Insurance facts and figures 2007 - PwC · AUSTRAC Australian Transaction Reports and Analysis...
Transcript of Insurance facts and figures 2007 - PwC · AUSTRAC Australian Transaction Reports and Analysis...
Insurance facts and figures 2007
This publication is designed to provide an overview of the accounting, tax and regulatory environment relating to insurance. Information contained in this booklet is based on the law and Government announcements as at 31 March 2007.
The information represents a summary of the significant features and should be used as a guide only. Readers are advised that before acting on any matter arising in this publication, they should discuss the situation with a PricewaterhouseCoopers Insurance partner.
Insurance Facts & Figures 2007 © 2007 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.
(“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.)
WL 58261
Editors:
Kim Smith Scott Fergusson
Publication Team:
Antoinette Chan Gillian Cass Renae Cooper
Contributors:
Alexandra Russ
Amy Johnson Billy Bennett
Damian Hollingsworth
Daniel Levine
Darren Mack
Deepa Neelakantam
Joanne Gorton Kathy Pratley
Mark Falvo
Pat Murray
Paul Daly
Peter Kennedy
Rachel Hutchinson Rod Balding
Sam Hinchliffe
Scott Hadfield
Yasser El-Ansary
Vanessa Shum
Insurance facts and figures 2007
ContentsIntroduction 2
1 Industry information 3Top 15 general insurers 4
Top 15 life insurers 6
Top 15 health insurers 8
Top 10 government insurers 10
Investment performance indicators 12
Inflation indicators 14
General insurance 15
Life insurance 20
Health insurance 22
2 Regulation and supervision 25Developments 26
Framework 30 • Reserve Bank of Australia 30 • Australian Prudential Regulation Authority 30 • Australian Securities and Investments Commission 33 • Private Health Insurance Administration Council 33
Authorisation 34
Supervision and compliance 40
Solvency and capital adequacy requirements 49
Investment policy 65
Reinsurance 66
3 Policyholder protection 71Framework 72 • Insurance Council of Australia 73
Product disclosure 75
Pricing and competition 77
Sales practice regulation 79
Ability to pay claims 80
Use of personal information 81
Sources of redress 82
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4 Financial reporting 85Developments 86
Framework 92 • Australian Accounting Standards Board 92 • Australian Prudential Regulation Authority 93 • Australian Securities & Investments Commission 95 • Australian Stock Exchange 95 • Private Health Insurance Administration Council 96 • Medicare Australia 96 • Life Insurance Actuarial Standards Board 96
Accounting standards 98
Annual accounts 119
Other returns 122
Key dates 129
5 Taxation 135Developments 136
Personal taxation 147
Levies and premium taxation 148
Stamp duty 149
Goods and services tax 151
Key dates 155
6 Insurance legislation 157Commonwealth legislation 158
State and territory legislation 163
Industry codes 163
7 Insurance directory 165Government authorities 166
Industry associations 170
Complaints review services 181
Registered general insurers 183
Registered life insurers 188
Registered health insurers 190
Government insurers 192
PwC Australian offices and industry experts 193
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GlossaryAASB Australian Accounting Standards Board
ACCC Australian Competition and Consumer Commission
ADI Authorised Deposit-Taking Institution
AFSL Australian Financial Services Licence
AGAAP Australian Generally Accepted Accounting Priciples
AHIA Australian Health Insurance Association
AIFRS Australian Equivalents to International Financial Reporting Standards
AML Anti-Money Laundering
APRA Australian Prudential Regulation Authority
ARPC Australian Reinsurance Pool Corporation
ASIC Australian Securities and Investments Commission
ASX Australian Stock Exchange
ATO Australian Tax Office
AUASB Auditing and Assurance Standards Board
AUSTRAC Australian Transaction Reports and Analysis Centre
BCM Business Continuity Management
CEO Chief Executive Officer
CFO Chief Financial Officer
CPI Consumer Price Index
CTF Counter-Terrorism Financing
CTP Compulsory Third Party
DAC Deferred Acquisition Costs
DAM Decreasing Adjustment Mechanism
ECS Exceptional Claims Scheme
FASB Financial Accounting Standard Board
FATF Financial Action Task Force
FCR Financial Condition Report
FICS Financial Industry Complaint Service
FID Financial Information Declaration
FSR Financial Services Reform
GAAP Generally Accepted Accounting Principles
GST Goods and Services Tax
HCCS High Cost Claims Scheme
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HIC Health Insurance Commission (now Medicare Australia)
HPPA Hospital Purchaser Provider Agreements
IAA Institute of Actuaries of Australia
IASB International Accounting Standards Board
IBD Insurance Brokers Disputes Limited
IBNER Incurred But Not Enough Reported
IBNR Incurred But Not Reported
ICA Insurance Council of Australia
IFRS International Financial Reporting Standards
ILVR Insurance Liability Valuation Report
KYC Know Your Customer
LAT Liability Adequacy Test
LIASB Life Insurance Actuarial Standards Board
LMI Lenders Mortgage Insurers
LTHC Life Time Health Cover
LVR Loan-to-Value Ratio
MAA Motor Accidents Authority
MCR Minimum Capital Requirements
MDO Medical Defence Organisation
MER Maximum Event Retention
MII Medical Indemnity Insurer
MOU Memorandum of Understanding
MSE Management Services Element
NIBA National Insurance Brokers’ Association
NOHC Non-Operating Holding Company
OCR Outstanding Claims Reserve
PAIRS Probability and Impact Rating System
PDS Product Disclosure Statement
PHIAC Private Health Insurance Administration Council
PHIO Private Health Insurance Ombudsman
PML Probable Maximum Loss
PST Pooled Superannuation Trust
RAS Reinsurance Arrangement Statement
RD Reinsurance Declaration
RE Responsible Entity
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REMS Reinsurance Management Strategy
RHBO Registered Health Benefits Organisation
RMD Risk Management Declaration
RMS Risk Management Strategy
ROCS Run-off Cover Scheme
SEA Segregated Exempt Assets
SO Senior Officer from Outside Australia
SPV Special Purpose Vehicle
Stage 2 Stage 2 of APRA’s general insurance reforms
TOFA Taxation of Financial Arrangements
UMP SP United Medical Protection Support Payment
UPR Unearned Premium Reserve
VPST Virtual Pooled Superannuation Trust
Introduction
Continued profitabilityWelcome to the annual PricewaterhouseCoopers’ Insurance Facts and Figures which shows continued profitability and capital strength by the Australian insurance industry.
FACTS AND FIGURES
A few highlights from the past year:
The general insurance industry posted strong profits for the fourth year running following the dramatic turnaround in the sector’s profitability in 2001-2002, with the industry maintaining positive underwriting results in 2006. Over the past three years, the direct insurers have generated returns on shareholders’ equity in excess of 20 per cent.
Health insurance pre-tax profits increased from the prior year, with membership numbers remaining stable.
The life insurance industry also improved its results on the prior year, on the back of continued strong growth in total assets held by the sector.
The insurance industry has produced these results despite increasing competition and further regulatory requirements coming into force during 2006. It seems unlikely that 2007 will bring respite from either of these.
I hope you find our 2007 edition of Facts and Figures interesting and informative as you deal with the many challenges ahead.
Kim Smith Australian Insurance Leader PricewaterhouseCoopers
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•
•
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Industry information
Top 15 general insurers 4
Top 15 life insurers 6
Top 15 health insurers 8
Top 10 government insurers 10
Investment performance indicators 12
Inflation indicators 14
General insurance 15
Life insurance 20
Health insurance 22
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44
Top 15 general insurers
Ranking Measure: Performance:
Net earned premium Underwriting result
Investment result
Result after tax
Entity Year end
Current $m
Prior $m
Prior Rank
% Change
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
1 QBE Insurance Group 12/06 8,158 7,386 1 10% 1,200 808 822 718 1,483 1,091
2 Insurance Australia Group 06/06 6,132 6,144 2 -0% 533 430 905 1,043 862 928
3 Promina 12/06 3,092 2,940 3 5% 263 186 307 327 549 507
4 Suncorp 06/06 2,527 2,471 4 2% 230 131 241 313 916 991
5 Allianz Australia 12/06 1,991 1,892 5 5% 213 94 243 280 349 276
6 Wesfarmers 06/06 783 735 6 7% 130 142 35 43 1,048 702
7 Zurich Australian Insurance 12/06 700 689 7 2% 104 75 161 146 232 246
8 Swiss Re 12/06 523 648 9 -19% 150 58 66 77 123 115
9 Munich Re 12/06 521 661 8 -21% 96 198 77 112 109 193
10 RACQ 12/05 347 340 10 2% 26 11 51 51 54 38
11 Chubb Insurance 12/05 231 229 11 1% 39 47 31 28 48 52
12 AIG (American Home Assurance) 12/06 225 224 13 0% 62 99 39 31 55 77
13 Westpac 09/06 182 162 15 12% 84 78 21 17 67 62
14 ACE Insurance 12/06 170 182 14 -7% 60 53 17 21 57 44
15 General Reinsurance Australia 12/05 136 203 12 -33% 52 (20) 42 27 51 (5)
Source: Published annual financial statements or Insurance Act Return, including segment reporting for organisations with significant non-general insurance activities
Notes: World wide premium is ranked for those companies/groups based in Australia, while only premium under the control of the Australian operations are included for those with overseas parents. Where a group has significant non-general insurance operations, only performance and position information relating to general insurance is disclosed (subject to availability). In some instances this involves estimating of a notional tax charge for the result after tax. Outstanding claims are net of all reinsurance recoveries.
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Industry information
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1Industry information
Financial Position:
Outstanding claims
Investments Net Assets Total Assets
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
11,645 10,870 18,915 16,503 6,349 5,159 31,757 29,665
6,008 5,957 9,929 10,370 3,761 4,503 16,972 17,102
2,242 2,220 4,503 4,626 1,480 1,549 6,921 6,904
4,249 4,172 3,920 4,085 4,433 5,261 57,369 52,488
3,337 3,298 5,453 4,625 1,666 1,518 10,669 7,592
253 197 659 634 348 340 1,563 1,513
944 961 1,320 1,182 541 467 2,357 2,367
1,105 868 1,479 1,784 551 830 1,993 2,541
998 987 1,618 1,698 475 450 2,242 2,236
458 404 652 558 172 282 852 731
336 276 529 422 229 129 836 716
780 225 651 544 256 222 1,395 1,074
43 38 341 277 200 172 521 434
144 185 333 360 167 146 962 1,069
(40) 38 677 649 276 225 1,131 1,189
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Top 15 life insurers
Ranking Measure: Financial Position:
Net Policy Liabilities Solvency Ratio
Financial Assets Held at FV
Net Assets Total Assets
Entity Year end
Current $m
Prior $m
Prior Rank
% Change
Current Prior Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
1 AMP 12/06 67,642 56,654 1 19% 1.7 1.6 77,996 68,853 2,975 3,757 89,159 77,473
2 National Australia Financial Management
9/06 46,240 41,960 2 10% 1.4 1.6 55,757 50,474 5,179 11,567 61,560 56,747
3 ING Australia 12/05 23,253 15,007 5 55% 2.4 2.1 23,964 17,564 1,244 3,729 29,035 19,412
4 Commonwealth Life 6/06 20,272 22,744 4 -11% 2.2 1.8 22,707 25,566 1,298 3,341 24,016 29,889
5 AXA Asia-Pacific 12/06 16,606 16,344 3 2% 4.5 8.2 26,919 26,857 1,502 1,386 20,764 20,165
6 Westpac Life 9/06 12,325 8,814 6 40% 3.4 4.6 1,211 1,477 588 1,717 14,543 10,234
7 Norwich Union Life 12/06 4,682 4,562 7 3% 4.7 5.6 5,327 5,079 481 456 5,755 5,463
8 Zurich Life 12/06 4,213 3,876 8 9% 1.5 1.5 3,805 2,832 394 369 6,336 5,818
9 Suncorp Life 6/06 3,846 3,201 9 20% 2.6 2.6 5,917 4,607 251 999 6,163 4,805
10 Promina 12/06 3,131 2,859 10 10% 1.8 1.7 4,131 3,816 963 915 4,709 4,303
11 Tower Australia 09/06 2,530 2,454 12 3% 2.9 2.9 2,672 2,452 294 283 3,200 3,093
12 Metlife 12/06 2,169 2,398 11 -10% 2.3 2.0 2,411 2,597 481 418 2,721 2,872
13 Challenger Life 6/06 2,138 2,272 13 -6% 1.2 1.7 2,731 3,452 1,279 750 5,239 4,104
14 Macquarie Life 3/06 2,096 2,087 14 0% 2.7 2.8 5,162 4,550 3,154 2,509 5,479 4,721
15 MBF Life 6/05 1,497 1,233 15 21% 8.1 3.4 1,461 1,411 106 124 1,792 1,432
Source: Published annual financial statements, including segment reporting for organisations with significant non-life insurance activities
Notes: World wide net policyholder liabilities is ranked for those companies/groups based in Australia, while only net policyholder liabilities under the control of the Australian operations are included for those with overseas parents. Policy holders liabilities are net of all reinsurance recoveries. Total assets include assets of life insurance statutory funds and shareholders’ funds. Investment revenue includes unrealised gains/losses and investment management expenses. Investments excludes excess of net market value of interests in subsidiaries.
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Industry information
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1Industry information
Performance:
Net Insurance Prem Rev
Investment Revenue
Result after tax
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
896 875 10,781 9,016 699 531
720 677 6,152 7,676 1,184 985
483 588 1,780 799 219 668
834 715 3,260 3,066 3,303 613
881 845 2,196 2,145 290 226
190 189 5,002 183 141 198
156 153 645 582 95 64
80 72 62 59 57 64
108 84 791 575 61 140
328 320 790 708 177 161
210 178 307 341 26 31
181 156 115 170 63 50
- - 376 492 118 250
1,574 891 292 260 229 239
28 26 64 65 6 10
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Top 15 health insurers
Ranking Measure: Performance:
Contributions Membership Investment income
Result after tax
Entity Current $m
Prior $m
Prior Rank
% Change
Current ‘000
Prior ‘000
Current $m
Prior $m
Current $m
Prior $m
1 Medibank Private 2,799 2,599 1 8% 1,375 1,351 103 68 200 131
2 MBF 1,991 1,834 2 9% 900 891 119 106 206 142
3 BUPA Australia Health 1,082 989 3 9% 472 464 26 21 82 54
4 HCF 880 803 4 10% 423 412 49 41 67 47
5 HBF 691 643 5 7% 374 373 57 42 80 49
6 NIB 612 531 6 15% 302 291 4 20 60 29
7 Australian Unity 393 277 7 42% 184 150 23 8 35 18
8 Australian Health Management 282 264 8 7% 120 111 (9) 12 38 32
9 Teachers Federation (R) 200 177 9 13% 82 77 8 7 14 5
10 Manchester Unity 168 146 10 15% 71 65 4 3 12 10
11 Defence Health (R) 154 131 11 18% 68 64 9 7 15 6
12 GMHBA 134 114 13 18% 70 69 8 6 13 5
13 CBHS Friendly Society (R) 131 117 12 12% 55 53 4 3 7 7
14 Westfund 72 64 15 13% 35 35 3 3 11 5
15 Health Partners 70 - - - 32 - 6 - 5 -
Source: PHIAC Annual Reports 30 June 2006 and 30 June 2005
Notes: (R) indicates a Restricted Membership Organisation (RMO)
Benefits ratio is benefits paid as a proportion of contributions.
Australian Unity purchased Grand United in 2006; comparative figures are for Australian Unity only. 2006 figures include
Grand United Corporate
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1Industry information
Financial Position: Ratios
Outstanding Claims
Investments Net Assets Total Assets Solvency Benefits Net Margin
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
Current Prior Current %
Prior %
Current %
Prior %
341 304 1,392 289 848 653 1,589 1,348 1.61 1.47 85% 87% 96.5 100.2
204 182 799 728 1,017 776 1,535 1,246 1.48 1.48 85% 87% 95.3 97.3
117 117 485 279 284 200 580 469 1.68 1.39 83% 86% 91.5 94.4
83 75 543 436 401 331 678 580 1.93 1.77 86% 88% 97.3 89.2
61 65 475 399 342 271 616 499 1.58 1.45 88% 90% 96.8 94.2
55 42 321 237 284 224 433 352 2.08 1.72 79% 84% 91.0 104.4
37 25 91 84 79 60 234 174 1.57 1.48 70% 83% 92.7 96.0
25 17 43 133 163 123 228 181 2.20 2.01 70% 78% 83.4 89.6
18 17 91 70 100 91 143 124 2.14 2.73 88% 92% 96.2 103.6
17 14 44 47 46 45 95 75 1.27 1.53 79% 78% 95.6 97.4
17 14 107 77 85 70 124 104 2.79 2.57 88% 93% 95.9 102.6
10 20 92 81 66 52 111 93 1.95 1.75 87% 91% 96.0 102.9
15 9 68 51 54 48 79 56 2.62 2.86 90% 90% 97.5 97.0
5 5 56 42 47 36 64 51 2.89 2.39 75% 81% 88.7 98.3
4 - 7 - 34 - 47 - 2.59 - 0% - 100.6 -
10
Top 10 government insurers
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Ranking Measure: Performance:
Net earned premium Underwriting Investment Result after tax
Entity Year end Notes Current $m
Prior $m
Prior Rank
% Change
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
1 NSW WorkCover Authority
06/06 2,925 2,703 1 8% 2,110 (181) 928 925 2,064 355
2 Victorian WorkCover Authority
06/06 1,668 1,787 2 -7% 226 209 1,338 1,006 1,003 775
3 Transport Accident Commission (Vic)
06/06 1,021 974 3 5% (112) (212) 943 841 604 464
4 NSW Self Insurance Corporation
06/06 1 930 892 4 4% 568 (126) 601 481 (168) 303
5 WorkCover Queensland 06/06 861 783 5 10% 576 (206) 373 323 669 87
6 WorkCover Corporation (SA)
06/06 544 501 6 9% (116) (106) 150 114 (42) (76)
7 Motor Accident Commission (SA)
06/06 386 378 7 2% (64) (55) 170 160 106 104
8 Insurance Commission of WA
06/06 352 338 8 4% (42) (9) 330 226 171 155
9 Comcare (Cwlth) 06/06 212 192 9 10% (76) (110) 9 7 35 26
10 Victorian Managed Insurance Authority
06/06 126 112 10 13% (62) (26) 108 70 45 44
Source: Published annual financial statements
Notes: Outstanding claims are net of all reinsurance recoveries.
1 Underwriting result has not been disclosed in financial statements and has been recalculated as net earned premium less net claims incurred. The figure is not comparable with the prior year.
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Industry information
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1Industry information
Financial Position:
Outstanding claims
Investments Net Assets Total Assets
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
Current $m
Prior $m
8,344 8,986 9,124 7,127 85 (1,998) 10,719 8,186
7,897 7,119 9,608 8,210 1,485 901 10,012 8,908
5,494 5,183 7,085 6,973 1,033 1,391 7,399 7,425
4,302 4,335 4,950 5,103 925 1,095 5,723 5,633
1,357
1,921 2,977 2,592 1,392 723 3,169 2,887
1,854 1,640 1,130 973 (694) (652) 1,288 1,120
1,436 1,346 1,893 1,703 326 220 1,956 1,790
1,283 1,267 1,792 1,521 577 384 2,285 1,990
1,438 1,583 0 0 71 36 2,336 1,449
640 490 830 601 199 144 903 678
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Investment performance indicators
Shares * Govt Bonds ** Property ***
Year
All Ordinaries S&P / ASX 200 Australian bond index Direct property index
Index Annual % change Index Annual % change Index Annual % change Index Annual % change
1980 629 -4.6 2.858 14.3
1981 700 11.3 3.312 15.9
1982 473 -32.4 3.991 20.5
1983 605 27.9 4.628 16.0
1984 659 8.9 5.348 15.6
1985 861 30.6 6.164 15.3
1986 1180 37.1 7.056 14.5
1987 1765 49.6 8.342 18.2
1988 1555 -11.9 1020 10.764 29.0
1989 1521 -2.2 1081 5.9 13.500 25.4
1990 1501 -1.3 1248 15.5 15.273 13.1
1991 1506 0.4 1525 22.2 14.153 -7.3
1992 1645 9.2 1666 - 1854 21.5 12.413 -12.3
1993 1738 5.7 1735 4.1 2109 13.8 11.157 -10.1
1994 1989 14.4 1931 11.3 2066 -2.0 11.520 3.3
1995 2017 1.4 1981 2.6 2308 11.7 12.596 9.3
1996 2242 11.2 2172 9.6 2528 9.5 13.452 6.8
1997 2726 21.6 2665 22.7 2954 16.9 14.563 8.3
1998 2668 -2.1 2620 -1.7 3287 11.3 16.011 9.9
1999 2969 11.3 2904 10.8 3389 3.1 17.280 7.9
2000 3258 11.5 3311 14.0 3599 6.2 18.896 9.3
2001 3425 5.4 3490 5.4 3849 7.0 20.748 9.8
2002 3163 -7.9 3216 -7.9 4081 6.0 22.480 8.3
2003 3000 -5.2 3026 -5.9 4487 9.9 24.800 10.3
2004 3530 17.7 3533 12.9 4571 1.9 27.334 10.2
2005 4230 19.8 4278 21.1 4939 8.1 31.016 13.5
2006 5034 19.0 5074 18.6 5069 2.6 37.011 19.3
2007 5816 13.5 5833 14.9 5223 3.0 41.480 12.1
Notes:
* Source: Bloomberg as at 30 June; Reserve Bank of Australia Bulletin, Table F7. New All Ordinaries index from April 2000 – Latest February 2007
** Source: UBS Warburg Treasury Bond Index (Bloomberg) – Latest February 2007
*** Source: InTech Management Pty Limited Property Index – Latest March 2007
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13
Industry information
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1Industry information
Debt securities ****
2/3 year bond (a)
10 year bond
Debentures 2 years
Debentures 3 years (b)
Housing loans
% % % % % Year
11.50 11.76 11.50 12.25 9.88 1980
13.20 13.10 14.25 14.75 11.50 1981
16.40 16.40 16.75 17.00 13.50 1982
13.70 14.70 13.50 14.00 12.50 1983
12.20 13.75 2.75 14.00 11.50 1984
13.45 13.50 13.75 13.50 12.00 1985
12.80 12.95 13.88 13.25 15.50 1986
13.00 12.80 13.98 14.00 15.50 1987
11.70 11.95 11.83 11.85 13.50 1988
15.40 13.50 15.38 15.15 17.00 1989
14.05 13.40 14.30 14.15 16.50 1990
10.55 11.17 10.20 10.50 13.00 1991
7.04 8.90 7.43 8.35 10.50 1992
6.22 7.37 5.93 6.55 9.50 1993
8.61 9.63 6.70 7.25 8.75 1994
8.27 9.21 7.75 7.85 10.50 1995
8.33 8.88 7.60 7.85 9.75 1996
5.93 7.05 5.50 5.90 7.20 1997
5.25 5.58 5.35 5.35 6.70 1998
5.63 6.27 5.05 5.45 6.50 1999
5.97 6.16 6.30 6.40 7.80 2000
5.55 6.04 5.20 5.45 6.80 2001
5.61 5.99 5.45 5.60 6.55 2002
4.47 5.01 4.10 4.20 6.55 2003
5.43 5.87 5.55 5.45 7.05 2004
5.10 5.11 5.35 5.40 7.30 2005
5.78 5.79 5.97 5.90 7.55 2006
5.93 5.69 6.20 6.20 8.05 2007
14
Inflation indicators
Wages * Prices **
Year
Average weekly earnings Average weekly ordinary times earnings
Consumer Price Index
$ Annual % change $ Annual % change Annual % change
1980 248.8 12.5 10.8
1981 280.1 12.6 278.5 8.7
1982 326.1 16.4 324.8 16.6 10.8
1983 365.1 12.0 346.0 6.5 11.1
1984 398.1 9.0 375.3 8.5 4.0
1985 423.1 6.3 396.9 5.8 6.6
1986 455.2 7.6 427.2 7.6 8.5
1987 479.7 5.4 450.1 5.4 9.3
1988 520.2 8.4 484.9 7.7 7.1
1989 553.8 6.5 516.6 6.5 7.6
1990 590.6 6.6 555.6 7.5 7.7
1991 610.7 3.4 578.8 4.2 3.4
1992 621.0 1.7 586.8 1.4 1.2
1993 642.5 3.5 604.2 3.0 1.9
1994 671.6 4.5 629.2 4.1 1.7
1995 702.9 4.7 659.9 4.9 4.5
1996 730.2 3.9 685.6 3.9 3.1
1997 753.2 3.1 711.3 3.7 0.3
1998 784.9 4.2 741.3 4.2 0.7
1999 805.0 2.6 763.2 3.0 1.1
2000 838.9 4.2 802.5 5.1 3.2
2001 885.4 5.5 848.7 5.8 6.0
2002 931.5 5.2 889.6 4.8 2.8
2003 987.3 6.0 938.4 5.5 2.7
2004 1027.3 4.1 976.4 4.0 2.5
2005 1078.5 5.0 1025.7 5.0 2.5
2006 1107.1 2.7 1058.6 3.2 4.0
2007 n/a n/a 3.3
Notes: * Source: Australian Bureau of Statistics, 6302.0 Average Weekly Earnings, time series for the year ended 30 November Based on all persons. Prior to 1983 data represents total male earnings only. Note that from October 1981 onwards the survey methodology was changed. Estimates are not comparable with earlier periods.
** Source: Australian Bureau of Statistics, 6401.0 Consumer Price Index for the year ended 30 June. 2007 data based on December quarter 2006.
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15
Industry information
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1Industry information
General insuranceDirect insurers Comparison of profitability – Year ended 31 December
Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01
Profit after tax/net assets
%
25
20
15
10
5
0
-5
10 year bond return
Jun 02 Dec 03 Dec 04 Dec 05 Dec 06
We have not included 31 December 2002 data
as APRA has not published statistics for this
period. For 2002, only June data available.
Dec 06Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Jun 02 Dec 03 Dec 04 Dec 05
Combined ratio
Loss ratio
Expense ratio
%
120
110
100
80
70
90
60
50
20
10
0
40
30
Interest67%
Equity9%
Indirect investments9%
Property, loans,advances & other
15%
Interest Equity Indirect investments Property, loans,advances & other
Annual % Change in proportional investment holdings
-1.5%
-1.0%
-0.5%
-0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
-2.0%
Loss and expense ratios – Year ended 31 December
Distribution of investments by sector
Annual movement in investments
Sou
rce:
Sel
ecte
d s
tatis
tics
on g
ener
al in
sura
nce
ind
ustr
y, A
PR
A,
Dec
emb
er 2
005.
16
16
Reinsurers
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
%
Dec 91 Dec 92
Profit/loss as % net assets 10 year bond return
Dec 90 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Jun 02 Dec 03 Dec 04 Dec 06Dec 05
We have not included 31 December 2002 data
as APRA has not published statistics for this
period. For 2002, only June data available.
%
160
140
120
100
80
60
40
20
0
-20Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Jun 02 Dec 03 Dec 04 Dec 06Dec 05
Combined ratio
Loss ratio
Expense ratio
Loss and expense ratios – Year ended 31 December
Interest88%
Equity4%
Indirectinvestments
2%Property, loans,
advances & other 6%
Distribution of investments by sector
Comparison of profitability – Year ended 31 December
Sou
rce:
Sel
ecte
d s
tatis
tics
on g
ener
al in
sura
nce
ind
ustr
y, A
PR
A,
Dec
emb
er 2
005
%1.02.03.04.05.0
0.0-1.0-2.0-3.0-4.0-5.0
Interest Equity Indirect investments Property, loans,advances & other
Annual % change in proportional investment holdings
Annual movement in investments
17
Industry information
17
1Industry information
We have not included 31 December 2002 data
as APRA has not published statistics for this
period. For 2002, only June data available.
Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Jun 02 Dec 03 Dec 04 Dec 05 Dec 06
Profit after tax/net assets 10 year bond return
%
25
20
15
10
5
0
-5
Total private sector
Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Jun 02 Dec 03 Dec 04 Dec 06Dec 05
Combined ratio
Loss ratio
Expense ratio
%
120
110
100
90
80
70
60
50
40
30
0
10
20
Loss and expense ratios – Year ended 31 December
Comparison of profitability – Year ended 31 December
Sou
rce:
Sel
ecte
d s
tatis
tics
on g
ener
al in
sura
nce
ind
ustr
y, A
PR
A,
Dec
emb
er 2
005
Interest Equity Indirect investments Property, loans,advances & other
Annual % change in proportional investment holdings
%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Annual movement in investments
Interest70%
Equity8%
Indirectinvestments
8%
Property, loans,advances & other
14%
Distribution of investments by sector
1818
Source: Insurance Disaster Response Organisation. Major disaster event list since June 1967.
Revised to June 2006. "Cyclone Larry' est. $350 mil residential cost only
Major Australian catastrophesOriginal cost adjusted to June 2006 CPI
Cyclone “Larry” Nth QLD, $350m* est.
Hailstorms Gold Coast, 2005, $63m
Hail, Storm, Winds NSW, TAS, VIC, 2005, $220m
Hail, storm Melbourne metro, 2003, $132m
Bushfires Canberra, 2003, $373m
Bushfires Sydney and NSW, 2001, $78m
Hailstorms Sydney, 1999, $2093m
Hailstorms, Brisbane, $95m
Floods (excl. Cyclone Les) NT, 1998, $87m
Cyclone “Sid” and floods QLD, 1998, $88m
Hailstorms Singleton NSW, 1996, $62m
Hailstorms Armidale/Tamworth NSW, 1996, $131m
Bushfires NSW, 1994, $79m
Storms Sydney, 1992, $166m
Storms Sydney, 1991, $321m
Flood and wind from Cyclone Joy Qld, 1990/1, $110m
Cyclone Nancy, Qld/NSW, 1990/1, $62m
Hailstorms Sydney, 1990, $564m
Earthquake Newcastle, 1989, $1364m
Hailstorms Western Sydney, 1986, $207m
Storms and floods Sydney, 1986, $70m
Cyclone Winifred, QLD, 1986, $80m
Hailstorms Brisbane, 1985, $389m
Bushfires NSW, 1984/5, $58m
Floods NSW, 1984, $184m
Ash Wednesday Bushfires SA & VIC, 1983, $421m
Storms and floods Dalby QLD, 1981, $59m
Thunderstorms NSW, 1977, $63m
Cyclone Ted Qld, 1976, $71m
Hailstorms NSW, 1976, $189m
Cyclone Joan, WA, 1975, $106m
Floods, Sydney, 1975, $80m
Cyclone Tracy, Darwin, 1974, $1240m
Cyclone Wanda, Brisbane, 1974, $421m
2006
2005
2003
2001
1999
1998
1996
1994
1992
1991
1990
1989
1986
1985
1984
1983
1981
1977
1976
1975
1974
050010001500
A ($m)
20002500
19
1Industry information
19
World catastrophesThe 40 most costly insurance losses
1970 – 2006
Hurricane Wilma; torrential rain, floods, US, $13.0bn
QHurricane Rita; floods, damage to oil rigs, US, $10.4bn
Hurricane Katrina, US, $66.3bn
Seaquake; tsunamis in Indian Ocean, $2.1bn
Hurricane Jeanne; floods, landslides, US & Carribean, $4.0bn
Typhoon Songda, Japan & Sth Korea, $3.8bn
Hurricane Ivan; damage to oil rigs, US, $13.7bn
Hurricane Frances, US & Bahamas, $5.5bn
Hurricane Charley, US & Carribean, $8.6bn
Hurricane Isabel, US, $2.3bn
Thunderstorms, tornadoes, hail, US, $3.5bn
Severe floods across Europe, Europe, $2.6bn
Terrorist attacks on WTC, Pentagon etc, US, $21.4bn
Tropical storm Allison; rain, floods, US, $4.1bn
Hail, floods & tornados, US, $2.5bn
Winter storm Martin, France & Spain, $2.9bn
Winter storm Lothar over Western Europe, $7.0bn
Winterstorm Anatol, Western/Northern Europe, $2.3bn
Typhoon Bart, South Japan, $4.9bn
Hurricane Floyd, Eastern US, Bahamas & Caribbean, $3.4bn
Hurricane Georges, US, Carribean, $4.4bn
Floods after heavy rain in Central Europe, $2.0bn
Hurricane Fran, US, $2.3bn
Hurricane Opal, US, $3.3bn
Rain, floods and landslides $2.1 bn
Great Hanshin earthquake in Kobe, Japan, $3.3bn
Northridge earthquake, US, $19.0bn
Blizzards, tornadoes, US, $2.7bn
Hurricane Iniki, US, $2.3bn
Hurricane Andrew, US, $23.0bn
Forest fires which spread to urban areas, drought, US, $2.5bn
Typhoon Mireille, Japan, $8.4bn
Winter storm Vivian, Europe, $4.9bn
Winter storm Daria, Europe, $7.2bn
Explosion in a petrochemical factory, US, $2.2bn
Hurricane Hugo, Puerto Rico, $7.4bn
Explosion on the Piper Alpha oil rig, UK, $3.4bn
Storms and floods in Europe, $5.5bn
Hurricane Frederic, US, $2.2bn
Tropical cyclone Fifi, Honduras, $2.0bn
2005
2004
2003
2002
2001
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1979
1974
010,0020,0030,00
A ($bn)
40,0050,0060,0070,00
Source: SWISS Re, Natural catastrophes and man-made disasters in 2004, Sigma no.1/2005
USD converted to AUD using exchange rate of $A1 = $US0.7762, 31 December 2004
2020
LIFE INSURANCETotal premiums
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
15
20
25
30
35
40
45
$bSingle Annual in force
10
5
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
40
50
60
70
80
90
100Ordinary Superannuation%
30
10
20
0
Superannuation and ordinary premiums (in force)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
5
10
15
20
25
30
35Ordinary Superannuation$b
0
Single premiums
Source: APRA Life Insurance Market Statistics, June 2006
21
1Industry information
21
New annual premiums
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
0.8
1.0
1.2
1.4
1.6
1.8
2.0Ordinary Superannuation$b
0.6
0.4
0.2
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
3.0
4.0
5.0
6.0
7.0
8.0
9.0Ordinary Superannuation$b
2.0
1.0
0.0
Average annual premiums in force
Source: APRA Life Insurance Market Statistics, June 2006
2222
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
2005
4,000
5,000
6,000
7,000
8,000
9,000
10,000
3,000
2,000
1,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20062005
-5%
0%
5%
10%
15%
20%
25%
30%
35%Profit before tax/net assets 10 year bond return
-10%
Comparison of profitability
Financial trends
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
2005
25%
30%
35%
40%
45%
50%
55%
20%
15%
10%
HEALTH INSURANCE
Percentage of persons with private health insurance by state
Source: PHIAC, Operators of the registered health benefits organisations, 2004-05
1Industry information
23
Combined ratio
Loss ratio
Expense ratio
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
2005
40%
60%
80%
100%
120%
20%
0%
Loss and expense ratios
Source: PHIAC, Operators of the registered health benefits organisations, 2004-05
24
Regulation and supervision
Developments 26
Framework 30 • Reserve Bank of Australia 30 • Australian Prudential Regulation Authority 30 • Australian Securities and Investments Commission 33 • Private Health Insurance Administration Council 33
Authorisation 34
Supervision and compliance 40
Solvency and capital adequacy requirements 49
Investment policy 65
Reinsurance 66
2
2626
2.1 DevelopmentsDevelopments over the last 12 months have centred on the Australian Prudential Regulation Authority’s (APRA) updates to the regulatory framework for the life and general insurance industry as well as several legislative changes affecting the health insurance industry.
LIFE INSURANCE PRUDENTIAL STANDARD REFORMS
APRA has released a number of new prudential standards with the aim of better aligning the prudential supervision of the life insurance industry with that of other APRA regulated industries. The new standards, and related practice guides apply to all life companies and friendly societies.
The following prudential standards were released by APRA in 2006 and 2007:
LPS 220 Risk Management (March 2007);
LPS 231 Outsourcing (October 2006);
LPS 232 Business Continuity Management (March 2007);
LPS 510 Governance (May 2006); and
LPS 520 Fit and Proper (March 2006)
These standards are now in force with the exception of LPS 220 and LPS 232 which are effective 1 January 2008.
In addition, APRA has released accompanying non-binding prudential practice guides:
LPG 200 Risk Management (March 2007);
LPG 230 Operational Risk (March 2007);
LPG 231 Outsourcing (October 2006);
LPG 232 Business Continuity Management (March 2007);
LPG 233 Pandemic Planning and Risk Management (October 2006);
LPG 240 Life Insurance Risk and Life Insurance Reinsurance Management (March 2007);
LPG 250 Asset and Liability Management Risk (March 2007);
LPG 260 Conflicts of Interest under Section 48 (March 2007);
LPG 510 Governance (May 2006); and
LPG 520 Fit and Proper (March 2006);
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27
Regulation and supervision
Following the introduction of the new prudential standards the following standards for Friendly Societies will be withdrawn on 1 January 2008, when LPS 220 and LPS 232 come into force.
PS 6.1 Risk Management;
PS 6.3C Audit;
PS 6.4A Subsidiaries
PS 6.4D Guarantees
PS 6.4E Overseas Trading; and
PS 6.7 Non-Benefit Fund Based Funds Management and Associated Market Activities.
APRA STAGE 2 GENERAL INSURANCE REFORMS
The following prudential standards became effective on 1 October 2006 as part of APRA’s Stage 2 of the general insurance reforms:
GPS 110 Capital Adequacy;
GPS 120 Assets in Australia;
GPS 220 Risk Management;
GPS 230 Reinsurance Management;
GPS 231 Outsourcing;
GPS 310 Audit and Actuarial Reporting and Valuation;
GPS 510 Governance and
GPS 520 Fit and Proper for General Insurers.
As part of APRA’s drive towards a principles-based approach to supervision, these standards are now accompanied by the following non-binding prudential practice guides:
GPG 200 Risk Management;
GPG 220 Credit Risk;
GPG 230 Operational Risk;
GPG 240 Insurance Risk;
GPG 245 Reinsurance Management Strategy;
GPG 250 Balance Sheet and Market Risk; and
GPG 520 Fit and Proper.
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Regulation and supervision 2
28
The requirements of these prudential standards and the recommendations of the prudential practice guide are summarised in this chapter.
PRIVATE HEALTH INSURANCE DEVELOPMENTS
Broader health insurance
From 1 April 2007, changes to private health insurance legislation through the Private Health Insurance Act 2007 have enabled registered health benefit organisations (RHBOs) to offer products that pay benefits for services that are part of, prevent, or substitute for hospital services. This has removed the boundary that previously existed between “hospital” and “ancillary” insurance.
Health funds can now expand hospital policies to cover treatments outside hospital, such as home dialysis or chemotherapy in doctors’ rooms, which substitute for or prevent hospitalisation. They are also able to cover programs to prevent problems such as heart disease or to manage obesity. Previously private health care had to be performed in-hospital if members were to receive a benefit from their health fund hospital member tables.
Risk equalisation arrangements
From 1 April 2007, new risk equalisation arrangements were implemented to replace the previous health benefits reinsurance arrangements. The new risk equalisation system consists of age-based pooling and a high-cost claims pool and no longer relates to episodes and specific age-based claims.
The new rules set out in the Private Health Insurance (Risk Equalisation Administration) Rules 2007 relate to the administration of the Trust Fund and the risk equalisation levy, including the kind of records to be kept by private health insurers who are required to pay the risk equalisation levy, the form in which those records are to be kept, and the format in which information is to be provided on a quarterly basis to the Private Health Insurance Administration Council (PHIAC).
Changes to Health Benefits Fund administration rules
PHIAC have issued rules on how health benefits funds will operate under the Private Health Insurance Act 2007. The Private Health Insurance (Health Benefits Fund Administration) Rules 2007 specify requirements for the administration and operation of health benefits funds, including requirements relating to expenditure and application of fund assets, the restructure of health benefits funds, and the merger and acquisition of health benefits funds. The Rules specify risk equalisation jurisdictions for the purposes of the Act and establish solvency and capital adequacy standards for the conduct of health benefits funds.
29
Regulation and supervision
The Private Health Insurance (Insurer Obligations) Rules 2007 establish a prudential standard relating to prudential matters for private health insurers; rules for the eligibility for appointment, and duties and powers of appointed actuaries; and Fund reporting and notification requirements.
PHIAC role and powers
The role and powers of PHIAC have been revised and prescribed in the Private Health Insurance Act 2007. PHIAC has the power to mandate prudential standards as part of their supervisory capacity and are likely to exercise this power in the year ahead.
2
30
2.2 FrameworkUnder the regulatory framework that has been in place since 1 July 1998, the responsibilities for the payments system, prudential regulation and consumer protection are allocated as shown in Figure 2.1.
Figure 2.1 – Framework for payments, prudential regulation and consumer protection in Australia
RESERVE BANK OF AUSTRALIA
The Reserve Bank of Australia is Australia’s central bank and has responsibility for monetary policy, overall financial system stability and, through the Payments System Board, supervision of the payments system.
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
APRA is the single Commonwealth authority responsible for licensing and prudential regulation for all deposit-taking institutions, life and general insurance companies, superannuation funds and friendly societies. APRA is also empowered to appoint an administrator to provide investor or consumer protection in the event of financial difficulties experienced by life or general insurance companies.
APRA’s powers to regulate and collect data from the insurance industry stem principally from the following acts:
31
Regulation and supervision
Insurance Act 1973 (the Insurance Act) for general insurance;
Life Insurance Act 1995 (the Life Act) for life insurance;
Financial Sector (Collection of Data) Act 2001;
Financial Sector (Shareholdings) Act 1998;
Insurance (Acquisitions and Takeovers) Act 1991; and
Financial Sector (Transfers of Business) Act 1999 for life insurance.
While licences to write most classes of insurance business are provided by APRA, state and territory governments issue licences to write certain compulsory classes of business, such as:
Workers compensation; and
Compulsory third party (CTP).
The status of these lines of business is shown below by state or territory.
Table 2.1 – State and territory regulation of workers compensation and CTP insurance
State/Territory Workers’ compensation CTP
ACT Privatised Monopoly private sector insurer (IAL)
NSW Private administration; risk borne by State
Privatised
NT Privatised Territory monopoly
QLD State monopoly Privatised
SA State monopoly with claims managed by licensed private sector insurers
State monopoly with claims managed by private sector insurer
TAS Privatised State monopoly
VIC Private administration; risk borne by State
State monopoly
WA Privatised State monopoly
As supervisor of general and life insurance companies, APRA administers:
The Insurance Act – APRA’s stated objectives in respect of general insurance are “to protect the interest of insurance policyholders, in particular, through the development of a well managed, competitive and financially sound general insurance industry”; and
The Life Act – The objective of the Life Act is to “protect policy owners and promote financial systems by encouraging a viable and competitive Australian life insurance industry with financially sound participants and fair trading practices”. Accordingly, APRA represents the interests of both current and future life insurance policyholders.
APRA supervises 35 life offices and just under 100 active general insurers.
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•
•
•
•
•
•
•
•
2
32
Although APRA is responsible for the prudential regulation of insurers, it is not responsible for product disclosure standards, customer complaints or licensing of financial service providers (including authorised representatives and insurance brokers) as these responsibilities fall to Australian Securities and Investment Commission (ASIC) under its Australian Financial Services Licence (AFSL) regime.
APRA co-operates with other regulators where responsibilities overlap. In particular, APRA works closely with ASIC and the Reserve Bank of Australia. It also liaises, when necessary, with the Federal Department of Treasury, the Australian Competition and Consumer Commission (ACCC) and the Australian Stock Exchange (ASX).
Since its establishment in 1998, APRA has been working to harmonise the regulatory framework of regulated institutions. The aim is to apply similar principles across all prudential regulation and to ensure that similar financial risks are treated in a consistent manner whenever possible.
APRA supervises life insurance companies authorised under the Life Act with a view to maximising the likelihood that these companies will be able to meet their obligations to policyholders. Prudential requirements for life insurance companies are set out in prudential standards and in prudential rules, as well as in actuarial standards determined by the Life Insurance Actuarial Standards Board (LIASB).
Probability and Impact Rating System
APRA’s primary objective is to minimise the probability of regulated institutions failing and to ensure a stable, efficient and competitive financial system. APRA uses its Probability and Impact Rating System (PAIRS) to classify regulated financial institutions in two key areas:
The probability that the institution may be unable to honour its financial promises to beneficiaries – depositors, policyholders and superannuation fund members; and
The impact on the Australian financial system should the institution fail.
As part of its role as a prudential regulator, APRA uses PAIRS to assess risk and to:
determine where to focus supervisory effort;
determine the appropriate supervisory actions to take with each regulated entity;
define each supervisor’s obligation to report on regulated entities to APRA’s executive committee, board and, in some circumstances, to the relevant government minister;
provide a risk diagnostic tool; and
ensure regulated entities are aware of how APRA determines the nature and intensity of their supervisory relationships.
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•
33
2Regulation and supervision
The PAIRS Supervisory Attention Index rises as the probability of failure and the potential impact of failure increase, ranging from “Low” to “Extreme”. These ratings are not publicly available, and are used only to identify potential issues and seek remediation before serious problems develop.
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
ASIC is the single Commonwealth regulator responsible for market integrity and consumer protection functions across the financial system. It is responsible for:
Corporate regulation, securities and futures markets;
Market integrity and consumer protection in connection with life and general insurance and superannuation products, including the licensing of financial service providers; and
Consumer protection functions for the finance sector.
Further details on ASIC’s role in consumer protection and the licensing of financial services providers can be found in Chapter 4. Most insurers require an AFSL, and as such, a dual licensing system exists with overlapping requirements under both ASIC and APRA.
PRIVATE HEALTH INSURANCE ADMINISTRATION COUNCIL
The Private Health Insurance Administration Council (PHIAC) was established under Section 82B of the National Health Act 1953 (the Health Act) and continues in existence by force of section 264-1 of the Private Health Insurance Act 2007. PHIAC’s central functions are to monitor and regulate the private health insurance industry.
Currently PHIAC supervise just under 40 health funds, which provide private health insurance coverage for 43 per cent of the population. APRA and PHIAC have signed a memorandum of understanding (MOU) setting out a framework for co-operation in areas of common interest. The MOU recognises the importance of close co-ordination and co-operation between the two organisations. In particular, it provides for exchange of relevant information and liaison on issues of joint interest.
Section 264-5 of the Private Health Insurance Act 2007 sets out PHIAC’s broad objectives which are to:
foster an efficient and competitive health insurance industry;
protect the interests of consumers; and
ensure the prudential safety of individual private health insurers.
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•
34
2.3 Authorisation
GENERAL INSURANCE
In September 2001, the Federal Parliament enacted amendments to the Insurance Act (known as the General Insurance Reform Act 2001) designed to create a three-tier regulatory system for general insurers:
Tier 1 – The Insurance Act contains the high-level principles necessary for prudential regulation;
Tier 2 – Prudential standards detail compliance requirements for companies authorised under the Insurance Act; and
Tier 3 – Guidance notes accompany each prudential standard, providing details of how APRA expects them to be interpreted in practice.
Stage 2 amended this approach to make Tier 2 more high-level, principles-based requirements and to replace Tier 3 with a set of prudential practice guides that provide non-binding guidance on prudential good practice and on how best to meet the requirements of the new standards.
Applications for licensing
No private sector general insurance company may conduct insurance business in Australia unless authorised under the Insurance Act. Under Section 12 of the Insurance Act, APRA can authorise a body corporate which has applied in writing to carry on an insurance business. APRA can impose and vary licence conditions of an insurer under Section 13 and exempt an insurer from complying with all or part of the Insurance Act under Section 7.
There is a guidance note on the authorisation of general insurers. In addition to requiring compliance with prudential standards, the note outlines supporting information expected to accompany an application, although APRA can request additional information as it sees fit. The information expected to be provided includes:
Details of the ownership structure, board and management (including resumes and the company’s constitution);
Applications for the proposed approved auditor and actuary;
A three-year business plan with financial and capital adequacy projections, including sensitivity analysis;
Systems and controls documentation (risk management strategy, reinsurance management strategy, business continuity plan and details of accounting and reporting systems);
•
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•
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•
35
2Regulation and supervision
Details of subsidiaries and associates and any proposed relationships;
An auditor’s certificate verifying the level of capital and capital ratios of the applicant;
An actuary’s report in accordance with GPS 310;
Written undertakings to comply with prudential standards at all times, consult and be guided by APRA on prudential matters and new business initiatives and provide relevant information required for the prudential supervision of the applicant; and
For foreign-owned insurers, approval of foreign parent’s home supervisor and details of the foreign parent’s operations and an acknowledgement that APRA may discuss the conduct of the applicant with its head office and home supervisor. In order to underwrite workers compensation or CTP insurance, additional approval from state and territory government regulators is required under the relevant state or territory legislation.
This guidance note has not yet been updated to reflect the changes in the prudential standards arising from Stage 2. Non-operating holding companies (NOHCs) are authorised in a similar manner as regulated general insurers under Sections 18–23.
Australian Financial Services Licence
ASIC requires all general insurers who sell insurance products to retail clients to hold an AFSL. The licensing requirements are discussed under “authorised representatives and insurance brokers” later in this chapter and the impacts on the sale and distribution of insurance products are discussed in Chapter 3.
Ownership restrictions
The Financial Sector (Shareholdings) Act limits shareholdings to 15 per cent of an insurer, unless otherwise approved by the Federal Treasurer. The Insurance (Acquisitions and Takeovers) Act complements this legislation by requiring government approval for offers to buy more than 15 per cent of an insurer.
Restructure of operations
The Insurance Act provides for the restructuring of insurance operations. Sections 17A to 17I of the Act allow for the assignment of insurance liabilities between insurers subject to the satisfaction of several steps, including:
Approval of APRA;
Informing affected policyholders; and
Obtaining confirmation of the assignment from the Federal Court of Australia
GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers provides more detailed information on the requirements for transferring insurance portfolios between registered insurers. In the event of revocation of an insurer’s
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•
36
authorisation, APRA can stipulate the assignment of liabilities immediately prior to the revocation. It should be noted that APRA can revoke a licence only with the Federal Treasurer’s approval, unless it is a request from an insurer with no remaining Australian insurance liabilities.
Under Section 29 of the Insurance Act, insurers must publish name changes in the daily press.
Section 116 addresses the issue of winding up an insurer and stipulates that assets in Australia can be applied only to settle liabilities in Australia (unless these are nil). For the purpose of this and the Section 28 solvency requirement, a reinsurance receivable from an overseas party is considered to be an asset in Australia if:
the reinsurance contract relates to Australian liabilities; and
reinsurance payments are made in Australia.
A liability is in Australia if the risk is in Australia or if the insurer has undertaken to satisfy the liability in Australia.
LIFE INSURANCE
All companies writing life insurance business, including friendly societies that are life insurers, must be registered under the Life Act. Part 3 of the Life Act, particularly Sections 17–22, and the Life Insurance Regulations 1995 Section 3.01 concern registration of life insurance companies.
Part A of Schedule 1 to the Life Insurance Regulations sets out the particulars required in the application for registration. These include:
Particulars of the company and each related company;
Proposed board and management structure, including relevant experience;
Proposed activities, including specific details of the classes of business and kinds of policies;
Operational structure;
Business plans, including sample premium rates and details of reinsurance;
Proposals for financing new life business over the greater of the period of proposed financing or 10 years. The accuracy of this information must be certified by the appointed actuary;
Particulars of the distribution arrangements;
Investment policy;
Particulars of administrative functions; and
Documents including the company’s constitution, financial statements, advice
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37
2Regulation and supervision
from the appointed actuary (Section 116) for each type of policy to be written and proposed reinsurance arrangements, service agreements, pro forma agency agreements and sample promotional material.
Companies must have paid-up share capital of at least $10 million and an excess of eligible assets over liabilities of at least $5 million.
Australian Financial Services Licence
ASIC requires all life insurers who sell insurance products to retail clients to hold an AFSL. The requirements for licensing are discussed under “authorised representatives and insurance brokers” later in this chapter, and the impacts on the sale and distribution of insurance products are discussed in Chapter 3.
Ownership restrictions
The Financial Sector (Shareholdings) Act limits shareholdings to 15 per cent of an insurer, unless otherwise approved by the Federal Treasurer. The Insurance (Acquisitions and Takeovers) Act complements this legislation by requiring government approval for offers to buy more than 15 per cent of an insurer.
HEALTH INSURANCE
An organisation may not carry on a health insurance business unless it is registered under Part 4-3 of the Private Health Insurance Act 2007. This replaced Section 68 of the Health Act.
The Private Health Insurance Administration Council has the power, on application to register as private health insurers bodies that are incoporated bodies for the purposes of the Corporations Law.
The Private Health Insurance Administration Council will take into account the ability of the application to comply with the obligations imposed by the Act. Registration is granted by the council subject to terms and conditions as the council sees fit.
Health funds must gain approval from the Prime Minister, Federal Treasurer and the Minister for Health and Ageing for any rule changes, including rate changes.
Health insurance organisations may be incorporated under a variety of different statutes, including companies and friendly societies incorporated under the Corporations Act 2001 and life insurance companies registered under the Life Act. There are also various special federal, state and territory-based organisations incorporated under their own acts relating to incorporated not-for-profit entities, such as co-operatives and associations.
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AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
The Corporations Act requires brokers to either hold an AFSL or become an authorised representative of a separate licensee. Except under limited circumstances, no person or company may carry on an insurance broking business or act as an agent of a foreign insurer unless they hold an AFSL under the Corporations Act or become a representative of a separate licensee.
Australian Financial Services Licence
The Corporations Act requires all sellers of insurance products to retail clients, including registered insurers and brokers, to obtain an AFSL.
To obtain a licence, the applicant must meet the obligations under Section 912A and demonstrate that they will provide financial services efficiently, honestly and fairly. Specific provisions under the Corporations Regulations require that financial services licensees have in place the following:
Documented procedures to monitor, supervise and train representatives;
“Responsible officers” (senior management responsible for day-to-day business decisions) with minimum standards of knowledge and skills in financial services;
Adequate resources (financial, technological and human) to provide services covered by the licence. These requirements do not apply to APRA-regulated entities (such as registered insurers), but do apply to any non-APRA-regulated subsidiaries;
Adequate risk management systems (AS4360, the Australian Standard for Risk Management, acts as a guide to minimum requirements). These requirements do not apply to APRA-regulated entities, but do apply to any non-APRA-regulated subsidiaries;
Adequate compliance framework (AS3806, the Australian Standard on Compliance Programs, acts as a guide to minimum requirements);
Internal and external dispute resolution procedures (where dealing with retail clients);
Adequate compensation requirements (where dealing with retail clients as described in Section 912B). This typically is achieved through membership of a guarantee fund or obtaining professional indemnity insurance cover; and
Register of representatives, i.e. directors and employees of the insurer and its related bodies corporate, as well as authorised representatives and insurance brokers.
Once ASIC has granted an AFSL pursuant to Section 913B of the Corporations Act, any variations to authorisations and conditions of the licence can be made electronically via the ASIC website.
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2Regulation and supervision
Financial and reporting obligations under the AFSL may vary depending on the licensee’s circumstances and whether additional requirements are imposed by ASIC.
Note: This is not intended to be legal advice and it should not be relied upon as such. Readers should obtain their own appropriate advice in relation to their specific circumstances, their obligations to obtain an AFSL and the specific obligations that may apply to them under their AFSL and applicable policy.
Renewal of registration
Holders of an AFSL are subject to ongoing financial requirements which are described in ASIC PS 166. These requirements include:
Positive net assets and solvency – All AFSL holders must be solvent at all times and have a continuous obligation to monitor their solvency.
Rolling three-month cash projections – There are two methods available for performing the projections:
– Option 1 – Reasonable estimate projection plus cash contingency requires licensees to have access to cash to meet any shortfalls in the projected period; or
– Option 2 – Contingency-based projection requires licensees to demonstrate that sufficient cash is available to meet commercial contingencies that could impact cash flow.
ASIC has provided additional options for subsidiary entities in consolidated groups to meet their cash needs projections by using the cash flows of their parent entity. This alternative can only be adopted where the subsidiary is able to demonstrate that it has an enforceable commitment from its parent entity to meet its liabilities or reasonably expects that it can draw upon the cash resources of other members of the consolidated group to meet its obligations. Licensees should refer to ASIC Information Release IR 03-44 for further information on this option.
Risk to financial resources – All AFSL holders must have systems to manage risk which includes risk to financial resources. The risk management framework required will depend on the nature, scale and complexity of the business.
Licence holders are required to meet ongoing notification obligations, which include requirements to notify ASIC about:
Breaches and events;
Changes in particulars (form F205 for change of name of corporate entities, form FS20 for all others);
Authorised representatives (forms FS30, FS31, FS32);
Financial statements and audit (forms FS70 and FS71); and
Appointment/removal of auditor (forms FS06, FS07, FS08 and FS09).
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Section 989B of the Corporations Act also outlines ongoing financial reporting and audit obligations. A licensee is required to prepare and lodge an audited profit and loss statement and a balance sheet within three months of the end of its financial year. ASIC Class Order 05/637 extended the lodgement deadline for an entity’s first AIFRS annual financial report, half-year financial report and AFSL audit opinions by one month. However, this relief is not applicable to listed disclosing entities.
ASIC has released Class Order 06/68 which grants relief to local branches of foreign licensees from preparing and lodging accounts in accordance with Section 989B of the Corporations Act. This relief is only available where the foreign licensee lodges accounts, prepared and audited in accordance with the requirements of its local financial reporting jurisdiction with ASIC once every calendar year.
2.4 Supervision and compliance
GENERAL INSURANCE
APRA supervisory objectives are met in two main ways:
The submission of financial and other returns so that APRA can monitor the financial position of the general insurer and its ability to meet policyholder claims as they fall due; and
The submission of signed statements and declarations from the general insurer, the approved auditor and the approved actuary that provide APRA with assurance that systems and procedures to meet regulatory requirements are in place, are adequate and have been independently tested.
The financial and other returns are described later in this chapter. The other regulatory requirements and the main features of the prudential standards are described on the next page.
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Table 2.2 – Summary of current prudential standards
Effective currently Details
GPS 110 Capital Adequacy See Section 2.5
GPS 120 Assets In Australia See Section 2.5
GPS 220 Risk Management See “Risk management” in this section
GPS 222 Business Continuity ManagementGGN 222.1 Risk Assessment and Business Continuity Management
See “Business continuity management” in this section
GPS 230 Reinsurance Management See Section 2.7
GPS 310 Audit and Actuarial Reporting and Valuation
See “Approved auditor and approved actuary” in this section and in Chapter 4
GPS 410 Transfer and Amalgamation of InsuranceBusiness for General Insurers
See Section 2.3
GPS 510 Governance See “Governance” in this section
GPS 520 Fit and Proper See “Fit and proper”in this section
Source: Australian Prudential Regulation Authority.
Risk management
GPS 220 aims to ensure that a general insurer has systems for identifying, assessing, mitigating and monitoring the risks that may affect its ability to meet its obligations to policyholders.
These systems – together with the structures, processes, policies and roles supporting them – are referred to as a general insurer’s risk management framework.
The prudential standard requires that a general insurer:
includes a documented Risk Management Strategy (RMS) in its risk management framework;
has sound risk management policies and procedures and clearly defined managerial responsibilities and controls;
submits its RMS to APRA on an annual basis and re-submit when any material changes are made;
has a dedicated risk management function (or role) responsible for assisting in the development and maintenance of the risk management framework;
submits a three-year rolling Business Plan to APRA and re-submits after each annual review or when any material changes are made;
submits a Risk Management Declaration (RMD) to APRA on an annual basis; and
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submits a Financial Information Declaration (FID) to APRA on an annual basis (see Chapter 5).
Risk management framework
The risk management framework should consider, at a minimum, the following risks:
Balance sheet and market risk;
Credit risk;
Operational risk;
Insurance risk;
Reinsurance risk;
Concentration risk; and
Risks arising from the business plan.
The framework should also cover other elements such as the interaction between the risk management role and the board; the processes used to identify, monitor and mitigate risks; and the mechanisms for monitoring the minimum capital requirements (MCR).
To assist general insurers in developing their own risk management framework, APRA has released the following non-binding prudential practice guides:
GPG 200 Risk Management;
GPG 220 Credit Risk;
GPG 230 Operational Risk;
GPG 240 Insurance Risk; and
GPG 250 Balance Sheet and Market Risk.
The general insurer is also required to have this risk management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurer’s operations and the extent of any change in the business mix or risk profile. The review must cover the RMS, the risk management role and the system of internal control.
Risk management declaration
The board of a general insurer is required to submit a RMD to APRA stating that:
it has systems in place for the purpose of ensuring compliance with the Insurance Act, the regulations, prudential standards, the Financial Sector (Collection of Data) Act,
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reporting standards, authorisation conditions, directions and any other requirements imposed by APRA, in writing;
the board and senior management are satisfied with the efficacy of the processes and systems surrounding the production of financial information at the insurer;
there is an RMS in place that sets out its approach to risk management and was developed in accordance with the requirements of GPS 220;
there is a Reinsurance Management Strategy (REMS) in place for selecting and monitoring reinsurance programs and developed in accordance with GPS 230;
over the last financial year, the insurer has substantially complied with its RMS and REMS obligations and that these strategies are operating effectively in practice, having regard to the risks they are designed to control; and
copies of the insurer’s current RMS and REMS have been lodged with APRA.
This declaration is to be signed by two directors (or the senior officer if a branch) and is due within four months of the financial year-end.
If this declaration contains any qualifications, the deviation from the risk management framework should be disclosed, as well as any mitigating factors or steps taken to rectify.
Business continuity management
The prudential standard and associated guidance note on business continuity management (BCM) GPS 222 Business Continuity Management and GGN 222.1 Risk Assessment and Business Continuity Management aims to ensure that general insurers have a holistic approach to BCM rather than focusing just on data recovery. The standard dictates that this “whole of business” approach and the BCM itself should be commensurate with the nature and scale of the entity.
Key requirements of the prudential standards include:
The board of directors and senior management of a general insurer must consider business continuity risks and controls as part of the company’s overall risk management framework, which must be provided to APRA annually;
A general insurer must identify critical business functions, resources and infrastructure which, if disrupted, would have a material impact on the company’s business operations, reputation or profitability;
A general insurer must assess the impact of plausible disruption scenarios on critical business functions, resources and infrastructure and have in place appropriate recovery strategies to ensure all necessary resources are readily available to withstand the impact of the disruption; and
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A general insurer must develop, implement and maintain through review and testing procedures, a Business Continuity Plan that documents procedures and information which enable the company to respond to disruptions and recover critical business functions.
Approved auditor and approved actuary
The key requirements of GPS 310 in relation to audit and actuarial reporting and valuation are:
An insurer must make arrangements to enable its approved auditor and approved actuary to undertake their roles and responsibilities;
The approved auditor must audit, and provide an opinion to the board on, the yearly APRA statutory accounts of the general insurer (see Chapter 4);
The approved auditor must review other aspects of the general insurer’s operations on an annual basis and prepare a report on these matters to the board (see “Approved auditor’s compliance opinion” below);
An approved auditor may also be required to undertake other functions, such as a special purpose review (see “APRA targeted reviews” below);
The approved actuary must prepare a Financial Condition Report (FCR) and an Insurance Liability Valuation Report (ILVR) and provide these reports to the board (see Chapter 4);
The approved actuary must apply GPS 310 when valuing the general insurance liabilities for the purposes of GPS 110 Capital Adequacy for General Insurers and reporting requirements under the Financial Sector (Collection of Data) Act (see below and Chapter 4);
A general insurer must arrange to have the ILVR of its approved actuary peer- reviewed by another actuary (see Chapter 4); and
A general insurer must submit all certificates and reports required to be prepared by its approved auditor and approved actuary to APRA.
Many of the requirements detailed above are covered in Chapter 4. Other regulatory compliance issues are discussed below.
Approved auditor’s compliance opinion
The approved auditor must prepare a report on an annual basis to the board of a general insurer that provides an opinion on a range of regulatory matters.
This report must be based on at least a limited assurance engagement and is to be prepared in accordance with professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB).
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The report must specify the results of the approved auditor’s investigations in respect of whether:
there exist systems, procedures and controls, that are kept up to date, which address compliance with all prudential requirements;
systems, procedures and controls relating to the integrity of actuarial data and source data used in the annual and quarterly APRA returns are adequate and effective; and
the general insurer has complied, in all significant respects, with its RMS and REMS obligations.
The report must include details of any qualification against the above, as well as reporting by exception any identified non-compliance with prudential requirements or any matters that will, or are likely to, adversely affect the interests of policyholders of the general insurer.
The report must be provided to the general insurer in sufficient time for it to be submitted to APRA on the day that their yearly statutory accounts are due.
Governance
GPS 510 Governance sets out what APRA consider to be the minimum requirements which must be met to achieve good governance. A sound governance framework is important in helping maintain public confidence in regulated entities. The actual governance arrangements in place will vary from entity to entity depending on the size, complexity and risk profile of each entity. However they key requirements stipulated in GPS 510 are:
specific requirements with respect to Board size and composition;
the chairperson of the Board must be an independent director;
a Board Audit Committee must be established;
regulated institutions must have a dedicated internal audit function;
certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; and
the Board must have a policy on Board renewal and procedures for assessing Board perform.
A number of these requirements also apply to foreign general insurers.
Fit and proper
GPS 520 applies to all general insurers and authorised non-operating holding companies. The key requirements of this standard are that:
An institution must have and implement a written fit and proper policy that meets the requirements of the standard;
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The fitness and propriety of a responsible person must generally be assessed prior to initial appointment and then re-assessed annually (or as close to annually as practicable); and
An institution must take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper.
The standard stipulates who are regarded as responsible people at different types of institutions and sets out additional restrictions on the approved actuary and approved auditor roles. However, it leaves the determination of what is an appropriate fit and proper policy in the hands of the general insurer.
APRA targeted reviews
Both the Insurance Act and the prudential standards stipulate that the approved auditor (or approved actuary) may be required to undertake other functions specified by APRA in consultation with the general insurer.
In 2003, APRA began a process of “targeted reviews” of general insurers, similar to the process it had implemented with the authorised deposit-taking institutions.
These annual reviews highlight a particular area that APRA is interested in and require the general insurer to engage the approved auditor to prepare a report in respect of that selected area of operation. Apart from highlighting areas where further improvement could be sought, these reviews provide APRA with an industry snapshot that helps to identify and promote best practices.
In 2006, the subject of APRA’s targeted reviews on general insurers was reinsurance documentation. This included reviewing the reinsurance management framework to ensure there was a process to have legally binding contracts in place and compliance with the 2 month and 6 month rules in GPS 230. The subject of the 2007 review is yet to be determined.
Prudential supervision of lenders mortgage insurance
In January 2006, APRA released GGN 110.6 and GRS 170.1. These took effect on 1 January 2006.
These new standards were introduced following the publication of two discussion papers in August 2004 and February 2005. The need for this reform was identified after a housing loan stress test was conducted by APRA on lenders mortgage insurers (LMIs) in late 2003. The stress test identified some inadequacies in the current capital framework and that there was an increasing number of LMIs taking advantage of the lower capital requirements than that applicable to authorised deposit-taking institutions (ADIs).
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APRA require LMIs to operate as mono-line insurers and has additional prudential requirements for LMI insurers:
A prescriptive maximum event retention (MER) model;
Changes to the MER reporting requirement; and
Measures to clarify the proposed definition of LMIs for qualifying capital concessions to ADIs.
LIFE INSURANCE
APRA supervisory objectives are met in two main ways:
The submission of financial and other returns so that APRA can monitor the financial position of the life insurer and its ability to meet policyholder claims as they fall due; and
Compliance with new prudential standards, which have been introduced on a progressive timescale.
In addition to the reporting obligations discussed in Chapter 4, Parts 7 and 8 of the Life Act grant powers to APRA to monitor and investigate life insurance companies, including the power to appoint a judicial manager. A judicial manager acts in a similar manner to the administrator of a financially troubled company and, in accordance with Section 175 of the Life Act is appointed by a judge to whom he must report the recommended course of action for the insurer.
The main features of the new prudential standards, operative 1 January 2008 are discussed below:
LPS 220 – Risk Management
The underlying principles of LPS 220 include requiring a life company:
to maintain a risk management framework that identifies, assesses, monitors, reports on and mitigates all material risks faced by the company
to have a written 3 year business plan approved by the board
to maintain a risk management strategy which outlines the companies risk appetite and its strategy for managing risk
to have its risk management framework subject to review by persons independent to the operation of the company
to supply APRA with an annual declaration on risk management approved by the board.
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LPS 232 – Business Continuity Management
The key elements of the prudential standard are:
Business Continuity Management Policy
Critical business operations
Business Impact Analysis
Recovery objectives and strategies
Business Continuity Plan
Review and testing of the Business Continuity Plan; and
Notification requirements.
HEALTH INSURANCE
In addition to monitoring the financial and statistical reports from health insurers as described in Chapter 4, PHIAC’s functions are:
to administer the Risk Equalisation Trust Fund
to administer the registration of private health insurers;
the information collection, compliance, enforcement, public information, agency cooperation; and
to advise the Minister about the financial operations and affairs of private health insurers.
PHIAC supervisory objectives are met in the following ways:
reviewing compliance with solvency and capital adequacy standards
examining from time to time the financial affairs of the private health insurers
reviewing the value of assets and liabilities of each health benefit fund by carrying out independent actuarial assessments
the collection and review of audited financial and other returns so that PHIAC can monitor the financial position of the private health insurer and its ability to meet their outstanding claims as they fall due
the collection of signed statements and declarations from the Private health insurers and their approved auditors that provide PHIAC with assurance that systems and procedures to meet regulatory requirements are in place, are adequate and have been independently tested.
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AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
In addition to annual financial reporting requirements, under Section 912E of the Corporations Act, ASIC can undertake surveillance checks of AFS licence holders. ASIC has the power to vary licence conditions, as well as issue banning orders that prohibit a person from providing financial services.
2.5 Solvency and capital adequacy requirements
GENERAL INSURANCE
Under Section 28 of the Insurance Act, authorised insurers are required to hold eligible assets in Australia that exceed liabilities in Australia, unless otherwise approved by APRA. Section 116A of the Insurance Act and GPS 120 Assets in Australia provide further details of excluded assets and liabilities.
The list of ineligible assets includes:
Goodwill;
Other intangible assets;
Net future income tax benefits; and
Assets under charge or mortgage (to the extent of the indebtedness).
GPS 110 imposes an additional requirement – the insurer’s capital base must exceed the greater of $5 million and the minimum capital requirement. Where APRA is not satisfied as to the margin by which the capital base exceeds the minimum capital requirement, it will require the insurer to detail a capital plan identifying the proposed actions to improve solvency.
The capital base is calculated by measuring available capital against the quality of the support provided by various types of capital instruments and the extent to which each instrument:
provides a permanent and unrestricted commitment of funds;
is freely available to absorb losses;
does not impose unavoidable servicing charges; or
ranks behind policyholders and creditors in the event of wind-up.
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Figure 2.2 summarises the calculation of the capital base. The minimum capital requirement can be calculated using either an internal model approved by APRA or by reference to APRA’s prescribed method. The minimum capital requirement represents an allowance for three types of risk:
Insurance risk – The possibility that the actual value of premium and claims liabilities will be greater than the value determined under prudential standards (GPS 310);
Investment risk – The risk that on-balance sheet assets and off-balance sheet liabilities will be realised at a different value to their reported amounts; and
Concentration risk – The largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to the concentration of policies, after netting out any reinsurance recoveries and allowing for the cost of one reinstatement premium for the insurer’s catastrophe reinsurance.
Insurance risk comprises two components: outstanding claims risk and premium liability risk. Both must be valued to allow for a margin that results in a 75 per cent probability of sufficiency. The method for valuing liabilities is detailed in GPS 310, and is discussed in further detail in Chapter 4. It should be noted that premium liabilities are not brought to account for financial statements purposes and that it is possible for directors to decide a different outstanding claims liability is more appropriate for statutory reporting purposes.
For capital adequacy purposes, any excess prudential margin over the 75 per cent sufficiency level, net of tax, can be included as part of the capital base. The actual capital charge for both risks is calculated using different capital factors for each class of business and for direct and inwards reinsurance business. The relevant factors are listed in Tables 2.3 – 2.6.
The investment risk capital charge is calculated by classifying each asset according to its quality and multiplying it by an investment capital factor as determined by APRA. Adjustments are made for off-balance sheet exposures and assets subject to charge or guarantee. Where a significant exposure to a single asset (e.g. property) or counterparty (e.g. single reinsurer) exists, the insurer may have to hold additional capital depending on the credit rating of the counterparty. The relevant investment capital factors and counterparty grades are listed in Tables 2.3 – 2.6.
Wholly owned subsidiaries that meet certain requirements may be consolidated in determining the investment risk capital charge.
The concentration risk capital charge is equivalent to the maximum event retention including the cost of one reinstatement premium for the insurer’s catastrophe reinsurance.
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Figure 2. 2 – Cap
ital base calculation b
ased on G
PS
110 Cap
ital Ad
equacy
for General Insurers
TIER
1 CA
PITA
LU
pp
er Tier 1 C
apital
Paid
up ord
inary shares;
General reserves;
Retained
earnings;
Current year after tax
earnings less expected
d
ividend
s;
Technical provisions in
excess of those required
b
y GP
S 310 Liab
ility;
Non-cum
ulative irred
eemab
le p
reference shares; and
Other “innovative” cap
ital instrum
ents (issued b
y the insurer or through sp
ecial p
urpose vehicles).
Do not req
uire AP
RA
ap
proval. A
ll other cap
ital instruments
require ap
proval.
Up
per Tier 2 C
apital only
eligible to m
aximum
of 100%
of Tier 1 Cap
ital (after d
eductions).
CA
PITA
L B
AS
E
Term of initial
instrument m
ust b
e greater than five years. A
mount
eligible for inclusion
as capital is
amortised
over the last five years. (e.g. a loan m
aturing in less than one year has only 20%
included
as Tier 2 C
apital).
+=
Lower Tier 2 C
apital
cannot exceed 50%
of eligib
le Tier 1 Cap
ital.
TIER
2 CA
PITA
LU
pp
er Tier 2 C
apital
Cum
ulative irred
eemab
le preference
shares;
Mand
atory convertible
notes and sim
ilar instrum
ents;
Perp
etual sub
ordinated
deb
t; and
Any other hyb
rid
(deb
t/equity) cap
ital instrum
ents of a p
ermanent nature.
Plus:
Low
er Tier 2 C
apital
Term subordinated debt;
Limited
life redeem
able
preference shares; and
Any other sim
ilar limited
life cap
ital instruments.
Insurance risk capital factors
Table 2.3 – Direct insurance
Table 2.4 – Inwards reinsurance
Householders 9% 13.5% Commercial Motor Domestic Motor
Travel Fire and ISR 11% 16.5% Marine and Aviation Consumer Credit Mortgage Other Accident
Other CTP 15% 22.5% Public and Product Liability Professional Indemnity Employers’ Liability
Classof Business Outstanding Premiums Claims Risk Liability Risk Capital Factor Capital Factor
Property
– Facultative Proportional 9% 13.5%
– Treaty Proportional 10% 15%
– Facultative Excess of Loss 11% 16.5%
– Treaty Excess of Loss 12% 18%
Marine & Aviation
– Facultative Proportional 11% 16.5%
– Treaty Proportional 12% 18%
– Facultative Excess of Loss 13% 19.5%
– Treaty Excess of Loss 14% 21%
Casualty
– Facultative Proportional 15% 22.5%
– Treaty Proportional 16% 24%
– Facultative Excess of Loss 17% 25.5% – Treaty Excess of Loss 18% 27%
Class of Business Outstanding Premiums Claims Risk Liability Risk Capital Factor Capital Factor
Source: APRA Guidance Note GGN 110.3
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Table 2.5 – Investment Capital Factors
Cash Debt Obligations of: the Australian Government; an Australian State or Territory government; or the national government of a foreign country where:
– the security has a Grade 1 counterparty rating; or, – if not rated, the long-term, foreign currency counterparty rating
of that country is Grade 1.GST receivables (input tax credits)Any debt obligation that matures or is redeemable in less than one year with a rating of Grade 1 or 2Cash management trusts with a rating of Grade 1 or 2Any other debt obligation (that matures or is redeemable in one year or more) with a rating of Grade 1 or 2Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 1 or 2 (subject to any determination by APRA under paragraph 5A of GGN 110.4)Unpaid premiums due less than six months previously Unclosed businessAny other debt obligation with a rating of Grade 3Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 3 (subject to any determination by APRA under paragraph 5A of GGN 110.4)Any other debt obligations with a counterparty rating of Grade 4Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 4 (subject to any determination by APRA under paragraph 5A of GGN 110.4)Any other debt obligations with a counterparty rating of Grade 5Reinsurance recoveries, deferred reinsurance expensesand other reinsurance assets due from reinsurers witha counterparty rating of Grade 5Listed equity instruments (including subordinated debt)Units in listed trustsUnpaid premiums due more than six months previouslyDirect holdings of real estate Unlisted equity instruments (including subordinated debt)Units in unlisted trusts (excluding cash management trusts listed above)Other assets not specified elsewhere in this tableLoans to directors of the insurer or directors of related entities (or a director’s spouse)Unsecured loans to employees exceeding $1,000Assets under a fixed or floating chargeGoodwill (including any intangible components of investments in subsidiaries)Other intangible assetsFuture income tax benefits (Assets in this category are zero weighted because they are deducted from Tier 1 Capital when calculating an insurer’s capital base)
Class of business
0.5%
1%
2%
4%
6%
8%
10%
100%
0%
Source: APRA Guidance Note GGN110.4
Investment Capital Factor
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1 AAA Aaa A++ AAA 2 AA+ Aa1 A+ AA+ 3 A+ A1 A A+ A A2 A- A A- A3 A- 4 BBB+ Baa1 B++ BBB+ BBB Baa2 BBB BBB- Baa3 BBB- 5 BB+ or below Ba1 or below B+ or below BB+ or below
Grade Standard & Poor’s Moody’s AM Best Fitch
Notes: Unrated assets or exposures should be classified as Grade 4. Insurers should, in general, use the same rating
agency for determining counterparty gradings. Where the insurer has counterparties with multiple ratings from
two or more of the rating agencies in the table above, the insurer should consistently choose the ratings of
a single agency whenever possible. For example, an insurer may have a number of counterparties that are
rated by Standard & Poor’s and AM Best. In this case, the insurer should choose a single agency that will
be consistently used whenever the individual ratings conflict. APRA’s approval must be sought if an insurer
wishes to use the rating determined by a rating agency not included in the table above.
Table 2.6 – Counterparty grades
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GPS 110 Capital Adequacy
GPS 110 Capital Adequacy requires that the general insurer’s capital base must exceed the greater of $5 million and the minimum capital requirement.
As depicted in Figure 2.2, a general insurer’s capital base is made up of Tier 1 and Tier 2 Capital. Tier 1 Capital comprises the higher quality capital elements. The amount of Tier 1 Capital to be included in an insurer’s capital base is net of the following six deductions (the last three of which were introduced under the draft GGN 110.1 Measurement of Capital Base):
Goodwill;
Other intangible assets;
Deferred tax assets (net of provisions for deferred tax liabilities);
During the second and third transition periods, all recoveries on all reinsurance contracts if the insurer has not met the transitional reinsurance documentation requirements;
After the third transitional period, recoveries under each reinsurance contract that do not meet the reinsurance documentation test; and
For reinsurers, the premiums receivable deductions on any proportional reinsurance treaties.
The main proposed changes in the calculation of the capital base are outlined below.
Insurance risk capital charge: Reinsurance recoveries
Reinsurance recoveries cannot be taken into account in calculating an insurer’s minimum capital requirement unless the reinsurance contract is appropriately documented and legally binding. APRA recognises that it may take some time for insurers to document all reinsurance contracts, and therefore, have introduced transition provisions. The issue of legally binding contracts is addressed in GPS 230 (refer section 2.7 below). This was the subject of APRA’s targeted reviews in 2006.
Treatment of proportional reinsurance treaties
Net premium receivable in excess of the net premium liability and the capital charge relating to that net premium liability recorded by a reinsurer on a proportional reinsurance contract where the underlying risks have not yet been written by the direct insurer will be inadmissible as an asset. This will be achieved via a deduction from the reinsurer’s Tier 1 Capital.
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General insurers in run-off
This applies to an insurer that is not writing new business at the time of request for a reduction in capital and is running-off its existing insurance liabilities. The insurer must present its current financial position and a capital plan within insurance liabilities valued in accordance with GPS 310, except that the valuation must be at a minimum of 99.5 per cent level of sufficiency.
Reductions in capital
A reduction in an insurer’s capital base is permitted subject to APRA’s prior approval. In GGN 110.1, if dividends and interest payments on Tier 1 Capital are wholly or partly funded from retained earnings, a reduction in the capital base may be allowed.
APRA proposes that dividends and interest payments must be compared to the after-tax profit reported to APRA in accordance with the prudential reporting framework, rather than under the Australian Accounting Standards.
Investment concentration charge: Application to group exposures
APRA proposes that when there is an aggregation of group exposure, there is also to be a sub-aggregation by “grade” and that these sub-aggregations would then be subject to the specified limits.
Off-balance sheet transactions
APRA proposes that under GGN 110.4 Investment Risk Capital Charge, unlimited exposures to any individual counterparties are not permitted. Exposures for an unlimited period of time will also not be allowed.
Counterparty grades: Use of rating agencies
APRA has the long-term view of aligning the way in which counterparty grades are used to determine investment capital charges for insurers with the way in which counterparty grades are used for authorised deposit-taking institutions. For details on the treatment of ungraded counterparties or for which multiple grades exist, refer to the discussion paper, “Prudential Supervision of General Insurance Stage 2 Reforms – Capital, assets in Australia and custodian requirements”, released in October 2005.
Probable maximum loss and maximum event retention calculations
In determining probable maximum loss (PML) and MER, an insurer should, at a minimum, adopt a single event approach. However, an insurer with a more complex portfolio of insurance risks may be required by APRA to estimate its MER and PML using a whole-of-portfolio approach.
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Regulation and supervision 2GPS 120 Assets in Australia
GPS 120 Assets in Australia sets out requirements applying to general insurers in relation to when assets are eligible to be counted as assets in Australia. Section 28 of the Insurance Act requires that all insurers are to maintain assets in Australia of a value that equals or exceeds the total amount of the general insurer’s liabilities in Australia.
APRA has thoroughly restructured and the main changes are outlined below.
Legal developments
Under the previous GPS 120, foreign securities held in depositories are not specifically excluded as assets in Australia. Under the revised prudential standard, assets that are not considered to be assets in Australia as interpreted by a court will be excluded.
Accordingly, assets not considered as assets under the Insurance Act, such as foreign securities held through Australian depositories, will be expressly excluded from being considered as assets in Australia.
Investments in subsidiaries or Special Purpose Vehicles
An insurer may set up either a company or a trust to act as an investment vehicle. APRA has introduced the concept of a Special Purpose Vehicle (SPV) which may either be a company or a trust. A look-through approach is applied to the assets held in an SPV so that assets of the SPV are treated as if they are directly held by the insurer for the purposes of determining assets in Australia.
If a subsidiary has shares registered and transferable in Australia, then those shares will, prima facie, be treated as assets in Australia. However, APRA will have the power to declare the asset a non-Australian asset. With regards to a subsidiary, APRA’s decision will be dependent on the nature of the investment.
The look-through approach will not apply to managed investment schemes. The claim on a managed investment scheme, usually in the form of units issued, will generally be considered an asset in Australia subject to some conditions.
Assets not included as assets in Australia
APRA will exclude loans to directors of the insurer, directors of related entities, a director’s spouse or unsecured loans to employees exceeding $1,000 from the calculation of assets in Australia.
GPS 231 Outsourcing
This standard aims to ensure that all outsourcing arrangements involving material business activities entered into by a general insurer are subject to appropriate due diligence, approval and monitoring.
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The key requirements of the new standard are:
A general insurer must have a policy relating to outsourcing of material business activities
A general insurer must have a legally binding agreement in place for all material outsourcing arrangements
A general insurer must consult with APRA prior to entering agreements to outsource material business activities to a third party who conducts their activities outside Australia
A general insurer must notify APRA after entering into agreements to outsource material business activities.
Lenders mortgage insurance
The main impacts on solvency and capital adequacy for LMIs were driven by GGN 110.6 and GRS 170.1 which came into effect on 1 January 2006 as follows:
The specification of the calculation of the MER charge that forms a significant part of the insurer’s minimum capital requirements. GGN110.6 details this calculation;
The implementation of reporting requirements to obtain a breakdown of the exposure underlying the PML by various loan attributes and to obtain more information about the reinsurance arrangements (outlined in GRS170.1); and
The change in the definition of “acceptable” mortgage insurance that determines the eligibility for ADIs to claim capital concessions. Specifically, the LMI will be required to be authorised by APRA or be domiciled in a country with similar prudential regulations. Where the LMI is wholly or partly owned by the ADI and the ADI is seeking capital concessions on the loans insured, the LMI must be authorised by APRA or meet comparable prudential requirements as set out in Attachment C of AGN 112.1 Risk Weighted On-Balance Sheet Credit Exposures.
The model for calculating the MER charge involves the following:
The model is based on the hypothesis of a three-year downturn in the housing market;
The probabilities of default to be applied allow for a three-year horizon. These vary by loan-to-value ratio (LVR) and have been calibrated to create a stressed scenario of “catastrophic” loss that would happen once in every 250 years. The probability of claim in year two was calibrated to be twice that in year one and three. This “head-and-shoulders” scenario was similar to that observed during stressed periods;
The losses given default to be applied were allowed to vary with the LVR;
The seasoning factors allow for the age of the loans;
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Additional capital penalties will be applied to non-standard loans, top cover or pool cover;
Available reinsurance recoveries over the three years can be recognised. Various constraints have been imposed in determining the extent to which recoveries can be recognised; and
An allowance for claims handling expenses has been made.
The above changes are intended to ensure that the MER is at a more appropriate level and is risk-sensitive.
Medical defence organisations
On 26 March 2003, the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 was enacted. It provides a transitional period from 1 July 2003 to 30 June 2008 for medical defence organisations (MDOs) to meet the capital requirements associated with APRA’s Prudential Framework for General Insurers.
Each prescribed MDO is required to lodge a funding plan with APRA, which demonstrates the achievement of APRA capital requirements before the end of the transitional period. The funding plan must be certified by the MDOs auditor and actuary. APRA has also used its power under the Financial Sector (Collection of Data) Act to apply the reporting requirements for general insurers to MDOs.
LIFE INSURANCE
The Life Act establishes a two-tier capital requirement on the statutory funds of life company:
Tier 1 (Solvency Requirement) requires a minimum capital requirement to ensure the solvency of the company. More specifically, to ensure that under a range of adverse circumstances, the company would be expected to be in a position to meet obligations to policyholders and other creditors in the context of a fund closed to new business, and which is either operating in a run-off situation or is to be transferred to another insurer.
Tier 2 (Capital Adequacy Requirement) is intended to secure the financial strength of the company to ensure that the obligations to, and reasonable expectations of, policyholders and creditors are able to be met under a range of adverse circumstances in the context of a viable ongoing operation.
Under the Life Act (Sections 67 and 72), life insurers are required at all times to meet the LIASB actuarial standards for solvency and capital adequacy.
The LIASB solvency standard requires that a company has a minimum level of capital available in excess of best-estimate liabilities to secure policyholders’ guaranteed entitlements under adverse conditions.
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The solvency requirement broadly comprises the following components:
Solvency liability – A calculation of the value of the guaranteed policy liabilities on the basis of assumptions that are generally more conservative than best-estimate assumptions;
Other liabilities – The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements;
Expense reserve – To provide for the loss of contribution from non-commission acquisition charges, which occurs upon closing a statutory fund to new business;
Resilience reserve – To allow for adverse movements in investment markets to the extent they will not be matched by corresponding movements in the liabilities (including an impact due to credit risk); and
Inadmissible assets reserve – To cover risks associated with holdings in associated financial entities and concentrated asset exposures.
The capital adequacy requirement broadly comprises:
Capital adequacy liability – A calculation of the value of liabilities on the basis of assumptions that are generally more conservative than the solvency liability assumptions;
Other liabilities – The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements;
Resilience reserve – Similar to the solvency requirements, except movements are more adverse (and also now captures impact due to credit risk);
Inadmissible assets reserve – As per the solvency requirements, except it excludes reserve for assets dependent on the continuation of the business; and
New business reserve – To provide for the solvency of the fund, assuming a planned level of new business over three years.
AS6.03 Management Capital Standard prescribes the minimum capital requirement to be held outside the statutory funds to ensure that under adverse circumstances the company would be able to meet its trading commitments and adequately service its policyholders.
APRA PS3 Prudential Capital Requirement complements AS6.03. The standard indicates that the minimum capital value is $10 million for life insurers (friendly societies, nil). This capital must be maintained as excess assets and at least 50 per cent must be in the form of eligible assets. According to APRA, a life insurance company will need to independently comply with the requirements of the prudential standard and actuarial standard AS6.03. However, the two requirements are not additive. The prudential standard will, generally, result in capital over and above that needed to comply with the actuarial standard only to the extent that:
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the amount of capital established by the actuarial standard is less than that prescribed by the prudential standard; and
the type of capital used in satisfying the actuarial standard does not comply with the prescribed form of capital required by the prudential standard.
Subject to approval from APRA, statutory funds must not be invested in related companies other than subsidiaries. The following assets are inadmissible for solvency purposes:
An asset with a value that is dependent upon the continuation of the business;
Holdings in an associated entity which is an institution itself subject to legislated minimum capital requirements; and
Assets which breach asset concentration thresholds.
HEALTH INSURANCE
Authorised health insurers are subject to solvency and capital adequacy tests under Schedule 2 and 3 of the Private Health Insurance (Health Benefits Fund Administration) Rules 2007. These tests were legislated under Divisions 140 and 143 of the Private Health Insurance Act.
Standards for capital adequacy and solvency were issued along with an interpretation standard and were applicable from 1 July 2005. (Health Benefit Organisations – Capital Adequacy Standard 2005, Health Benefit Organisations – Solvency Standard 2005, Health Benefit Organisations – Interpretation Standard 2005.)
The standards place a far more rigorous reporting requirement on funds. They need to demonstrate the soundness of their financial position, considering both their existing balance sheet position and the profitability of future business.
The Health Legislation Amendment Act specifies a two-tier capital requirement for health benefits funds, with each tier considering the capital requirements of a different set of circumstances.
AS2.04 Solvency Standard is a short-term test that prescribes the minimum capital requirements of a health benefits fund to ensure that under a wide range of circumstances it would be in a position to meet its obligations to members and creditors.
The solvency standard is essentially based on a “run-off” view of the fund. It must demonstrate that it can reliably meet its accrued liabilities and obligations in the event of a wind-up. It should be noted that there is a difference between meeting the solvency standard and being solvent in terms of the Corporations Act. A fund meeting the solvency standard is required to hold reserves to meet its obligations to members and staff, such that it should be in a position to avoid insolvency as defined under the Corporations Act.
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AS3.04 Capital Adequacy Standard is a longer-term test that prescribes the capital requirement of a health benefits fund to ensure that its obligations to, and reasonable expectations of, contributors and creditors can be met under a range of adverse circumstances. The capital adequacy requirement is thus based on an ongoing view that requires a fund to show that it has sufficient capital to implement its business plans, accept new business, absorb short-term adverse events from time to time and remain solvent.
The interpretation of the standard sets out and explains the components used in applying the solvency and capital adequacy standards. The standards are based on the concepts of liability risk, asset risk and other risks.
Liability risk
The liability risk can be considered as the amount required to meet existing liabilities (solvency and capital adequacy standard) plus an amount to meet the liability associated with continuing to write business (capital adequacy standard). The amount required to meet existing liabilities is set as the sum of the:
Net claims liability;
Reinsurance accrued liability; and
Other liabilities.
The net claims liability is outstanding claims net of reinsurance on outstanding claims and the liability in respect of unexpired risk (determined as the contributions in advance multiplied by a specified loss ratio). Each item includes a margin and includes associated claims handling expenses. The margin is prescribed at 10 per cent for the solvency calculation, while the capital adequacy margin is determined by the board (subject to a prescribed minimum of 12.5 per cent) based on a qualitative risk assessment of the fund’s membership base and the volatility of claims. For both the solvency and capital adequacy standards, the net claims liability should not be less than the reported liability.
The reinsurance accrued liability is the amount due/payable from the reinsurance trust fund in the coming period in respect of members covered and benefits paid from prior periods. The liability is thus the reinsurance levy for members covered in the preceding quarter, less benefit payments that can be recovered from the reinsurance trust fund. A margin is added to the reinsurance levy (currently 10 per cent).
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Other liabilities are the normal outstanding business obligations
The capital adequacy standard is also concerned with the additional capital required to continue to cover members’ future benefits (referred to as the renewal options reserve) and to fund business plans (referred to as the business funding reserve).
The renewal options reserve takes into account the risks and potential costs associated with providing members with the right to renew membership. The reserve is based on a best-estimate projection of the net earned contribution income less incurred payments and costs, with suitable conservative margins added to the cash outflows in the projection. The projections have been amended within the new standard, with a major difference being the allowance for investment income on outstanding claims provisions.
The business funding reserve is intended to ensure solvency over the projected period. It requires an insurer to hold sufficient reserves to meet the demands of any planned increase in membership and of other business development strategies.
Asset risk
The asset risk is the risk to the value of assets supporting the liabilities. Asset risk can be considered in two parts:
Inadmissible assets; and
Resilience reserve.
Inadmissible assets include assets in associated entities and risks from asset contagion, asset concentration and general asset credit or liquidity. The new standard changes the amount of loan assets or credit exposures permitted.
The factors considered in calculating the inadmissible asset reserve are as follows:
A reserve must be maintained if the value of a business’ assets in a run-off situation is less than the value of the assets in an ongoing situation;
If the health benefits fund has investments in an associate or subsidiary that is prudentially regulated, a reserve must be maintained that represents the prudentially regulated capital within the value of the associate or subsidiary in the financial statements of the health benefits fund; and
A reserve is required to be held against the adverse impact of concentration of investments in a particular asset with a particular counterparty or related party.
The capital adequacy standard prescribes certain limits and weightings depending on the asset type. The resilience reserve is based on an assessment of the fund’s ability to sustain shocks that are likely to result in adverse movements in the value of its assets relative to its liabilities. The reserve is calculated with reference to the admissible assets of the fund and by applying a calculated diversification factor (based on each fund’s asset exposure) to a prescribed movement in returns per investment class.
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The resilience reserve is intended to provide protection against adverse movement in the value of assets. The reserve considers the fall in value of assets by the investment sector under adverse conditions, assuming greater adversity in the capital adequacy test. An offset is allowed for diversification of assets.
Other risks
In addition, the standards require an allowance for management capital and, in the solvency test, for an expense reserve. The management capital reserve is designed to ensure that health funds maintain a minimum dollar level of capital. In practice, this test applies only to small funds. The expense reserve, in the run-off test, allows for unavoidable expenses expected to be incurred as a fund adjusts to a run-off status. The solvency standard calculates the expense reserve as 40 per cent of total non-claim expenses.
AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
The minimum solvency requirements under the AFSL regime are:
Positive net assets;
Sufficient cash resources to cover the next three months’ expenses with adequate cover for contingencies; and
Surplus liquid funds of greater than $50,000 where the licensee holds client assets of more than $100,000.
Further conditions may be set out under the AFSL itself. Compliance with these requirements is tested through audits undertaken by the licensee’s auditor both annually and at the request of ASIC.
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2.6 Investment policy
GENERAL INSURANCE
There are no absolute restrictions on investments that may be held by insurance companies except the trust account requirements of the Financial Services Reform (FSR) Act 2001. Under Section 1017E of the FSR Act, which applied from 11 March 2002, where monies received cannot be applied to the issue of a product within one business day of receipt (i.e. unmatched cash), the monies must be held in a trust account. Details of the requirements for trust accounts are described in “authorised representatives and insurance brokers” earlier in this chapter.
However, in calculating the minimum capital requirement of an insurer under GPS 110, the capital charge assigned to each asset type is given a different weighting, taking into account its nature and the credit rating of any counterparties. These are detailed in Tables 2.3 – 2.6. Significant individual exposures may require an additional capital charge. APRA also has the power under Section 49N to direct an insurer to record an asset at a specified value, subject to approval of the Federal Treasurer.
LIFE INSURANCE
There are no absolute restrictions on investments that may be held by life insurance companies subject to similar capital requirements for certain assets as outlined above.
Under Section 1017E of the FSR Act, which applied from 11 March 2002, where monies received cannot be applied to the issue of a product within one business day of receipt (i.e. unmatched cash), then the monies must be held in a trust account. Details of the requirements for trust accounts are described earlier in this chapter.
HEALTH INSURANCE
There is no restriction on investments that may be held by health benefits funds. However, in calculating the solvency requirement and the capital adequacy requirement under the respective standards, the level of capital required varies with the risk profile of the investment portfolio. This is addressed through the calculation of an inadmissible assets reserve and a resilience reserve.
INSURANCE BROKERS AND AUTHORISED REPRESENTATIVES
Authorised representatives and insurance brokers are required to hold monies in a trust account with an ADI, cash management trust or an ASIC-approved foreign deposit-taking institution. The authorised representative or insurance broker is required to disclose to the insured that they intend to keep any interest earned and must deposit the monies into such an account on the day it is received or on the next business day.
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Funds held in a trust account can be invested in a broad range of investments (such as government bonds), but the rules relating to this are complex and should be considered in detail. Typically, any investment requires a written agreement as to the arrangements, which will address issues such as how investment earnings and losses are shared.
ASIC has issued a class order which provides limited relief to insurance brokers regarding their ability to pay money into a trust account under Section 981B of the Corporations Act 2001. The class order CO 04/189 allows other money paid in a single sum together with client monies to be paid into a trust account established and maintained under Section 981B of the Act by a financial services licensee who is an insurance broker. Section 981B generally permits only client monies to be paid into the trust account. The class order relief allows payment into an insurance broker’s trust account of mixed payments; however, non-client money can only be held in the account for a maximum of five business days.
2.7 Reinsurance
GENERAL INSURANCE
GPS 230 aims to ensure that a general insurer, as part of its overall risk management framework, has a specific reinsurance management framework to manage the selection, implementation, monitoring, review, control and documentation of reinsurance arrangements.
These systems, together with the structures, processes, policies and roles supporting them, are referred to as a general insurer’s risk management framework.
The standard requires that a general insurer:
has in its reinsurance management framework a documented REMS, sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls;
submits its REMS to APRA on an annual basis and re-submits when any material changes are made;
submits a Reinsurance Arrangements Statement (RAS) detailing its reinsurance arrangements to APRA at least annually; and
makes an annual reinsurance declaration (RD) based on the “two-month rule” and “six-month rule” and submits the declaration to APRA.
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Reinsurance management framework
The reinsurance management framework should include both reinsurance and retrocession arrangements and have a clear link to the risk management strategy. It should include clearly defined management responsibilities and controls, policies and procedures to manage the selection, implementation, monitoring, review, amendment and documentation of reinsurance arrangements of the general insurer, and a written, board-approved REMS.
The REMS should document the objectives and strategy for reinsurance management including the risk appetite of the general insurer, the policies for setting and monitoring aggregate retentions and upper limits on policies, the methods for choosing appropriate reinsurance participants and the process used for setting and monitoring the MER.
Members of global groups are expected to provide details of global reinsurance arrangements. Although APRA does not specify absolute limits on cessions, it has indicated that it would expect the level of ceded business to be no greater than 60 per cent for direct insurers and 90 per cent for captive insurers.
To assist general insurers in developing their own risk management strategy, and in the spirit of the new principles-based approach under Stage 2, APRA has also released GPG 245.
The general insurer is also required to have this reinsurance management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurer’s operations and the extent of any change in the reinsurance program or risk appetite.
As with the risk management strategy, the REMS is subject to an annual review by the approved auditor, providing limited assurance to APRA that the insurer has complied with the REMS at all times during the reporting period.
Reinsurance arrangements statement (RAS)
General insurers are required to submit a RAS. This is evidence of the implementation of the REMS and details:
Schematics of the insurer’s reinsurance program that depict retention levels, aggregate deductibles, policy layers, stop-loss policies, reinstatements, loss participation clauses and event limit clauses;
The parameters for each class of business that represent the highest potential loss exposure and how the program reduces the gross loss to the general insurer; and
Details of the MER calculation including modelling of catastrophes, PML and realistic disaster scenarios.
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If the reinsurance program has a common date of renewal then this statement is due annually within two months of the renewal date. If there are multiple inception dates then this statement must be submitted to APRA every six months.
Reinsurance declaration
General insurers are also required to submit an annual RD. This statement must be signed by both the CEO and the chief reinsurance officer and declare that all reinsurance arrangements placed are “legally- binding” under either APRA’s “six-month” or “two-month” rule.
The two-month rule states that within two months of the inception date, the general insurer either:
Has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers and contains a slip wording, with no outstanding terms or conditions to be agreed; or
Has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers, with no outstanding terms or conditions to be agreed; or
Does not have a placing slip, but has a cover note issued by the participating reinsurer (in the case of direct placements with reinsurers) or from its appointed reinsurance broker (in the case of intermediated reinsurance placements). The insurer also must have systems to verify that the content of the cover note is the same as the placing slip agreed between the insurer and the reinsurer.
The six-month rule requires that within six months of the inception date, the general insurer either:
Has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers and contains a slip wording, with no outstanding terms or conditions to be agreed; or
Has in its possession a full treaty contract wording (including any appending contract wordings and/or schedules) that has been signed and stamped by all contracting parties, namely the insurer and all participating reinsurers.
If there are any reinsurance arrangements in place that do not meet these requirements then they should be disclosed on the declaration. Recoveries arising from these arrangements will not be eligible for inclusion as Tier 1 Capital.
The RD is to be submitted to APRA on the day that the yearly statutory accounts are due.
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Other schemes to limit gross exposure
Two schemes cover doctors with medical indemnity insurance. From 1 January 2004, the High Cost Claims Scheme (HCCS) covers half the cost of each medical indemnity claim over $300,000 (this was $2 million for the period 1 January 2003 to 31 December 2003), up to a cost of $20 million per claim. This scheme aims to minimise the impact that large claims may have on the ability of medical indemnity insurers to provide cover. The Exceptional Claims Scheme (ECS) assumes liability for 100 per cent of any damages payable against a doctor that exceed the doctor’s insurance contract limit.
The doctor must have medical indemnity insurance cover to at least $20 million for claims notified from 1 July 2003. The ECS will cover the same events and incidents as the doctor’s insurance policy, but will not cover claims from the treatment of public patients in public hospitals or claims from the treatment of patients overseas.
The Terrorism Insurance Act 2003 rendered terrorism exclusion clauses ineffective and established the Australian Reinsurance Pool Corporation (ARPC) to manage a scheme for terrorism insurance coverage for commercial property, business interruption and public liability businesses. The scheme was in response to the progressive withdrawal of cover by insurers and reinsurers in the aftermath of the September 11, 2001 terrorist attacks. The scheme began on 1 July 2003 and covers any declared terrorist incident, except damage from nuclear causes. Various types of coverage are also excluded.
There is a two-tier reinsurance premium structure under the scheme. Insurance companies pay an initial standard rate (based on the class of business covered and geographical location of the property) and are expected to build up a $300 million pool of funds over three years. There is a maximum post-terrorist event rate (again based on the class of business covered and geographical location of the property) for replenishing the scheme in the event of a major incident. The $300 million pool will be supplemented by another $10 billion from the Australian Government. Insurance companies must retain $1 million of claims cost per annum when reinsuring with the ARPC.
LIFE INSURANCE
The Life Act requires that all life companies writing life insurance business, including friendly societies, provide APRA with an annual reinsurance report setting out the particulars (as in Prudential Rule No. 23) of their reinsurance arrangements for the financial year within three months of the end of the financial year to which it relates.
The reinsurance report must set out the opinion of the life company’s appointed actuary on whether the reinsurance arrangements were adequate and effective, and whether they have been accounted for in accordance with actuarial standards.
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The Life Act also provides that certain reinsurance arrangements of life companies require specific approval from APRA. These are primarily contracts that contain elements of financial reinsurance. The details surrounding the application for approval are outlined in Prudential Rule No. 24.
HEALTH INSURANCE
RHBOs do not typically carry reinsurance. However, private health funds participate in the risk equalisation arrangements administered by PHIAC. Risk Equalisation aims to spread the burden of high cost claims across the industry to avoid the financial strain of the costs being borne by individual funds. The Risk Equalisation arrangements were updated by PHIAC effective 1 April 2007.
The arrangements operate by RHBOs paying a levy into a Health Benefits Risk Equalisation Trust Fund. RHBOs prepare membership and benefit data on a quarterly basis in the form of PHIAC 1 returns and submit this to PHIAC.
AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
Authorised representatives and insurance brokers do not require reinsurance.
Policyholder protection
Framework 72
Product disclosure 75
Pricing and competition 77
Sales practice regulation 79
Ability to pay claims 80
Use of personal information 81
Sources of redress 82
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3.1 FrameworkThe insurance industry exposes providers and policyholders to a variety of risks, including credit risk, market risk, event risk and operational risk. Every provider carries these risks to varying extents depending on the nature of the promises made to policyholders. Prudential regulation is largely about managing these risks in a way that supports the promises made to policyholders.
Frameworks for policyholder protection in insurance markets differ around the world. However, since the Wallis Inquiry of the late 1990s, the Australian policyholder protection framework has been founded on the following three strands of regulatory supervision:
Australian Prudential Regulation Authority (APRA) – Solvency of insurance providers and prudential regulation to protect the interests of policyholders in ways that are consistent with the development of a viable, competitive and innovative insurance industry;
Australian Securities and Investments Commission (ASIC) – Policyholder protection and the market integrity of insurance providers; and
Australian Competition and Consumer Commission (ACCC) – Fairness and competition in the insurance industry.
The framework is complemented by general legislation governing conduct and disclosure for all industries, including insurance. The objectives of the Australian policyholder protection framework and the key mechanisms and activities that regulators have put in place to support the framework are explained below.
The key objectives of policyholder protection are to ensure:
Product disclosure – Providing policyholders with all relevant information upon which to base an informed decision;
Pricing and competition – Offering policyholders a range of insurance products in a competitive environment;
Sales practice regulation – Providing sales advice and customer service of the highest possible standard;
Ability to pay claims – Maintaining sufficient capital and resources to pay claims as they fall due;
Use of personal information – Storing and using information provided by policyholders appropriately; and
Sources of redress – Offering adequate sources of redress in the event of policyholder dissatisfaction.
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INSURANCE COUNCIL OF AUSTRALIA – CODE OF PRACTICE
The ICA released a new Code of Practice in July 2005 for general insurers. The only types of general insurance that are not covered by the Code are reinsurance and the lines of business that are covered by specific government statute, such as workers compensation and compulsory third party (CTP).
Participation in the new Code continues to be discretionary. The key objectives of the Code are:
to promote better, more informed relations between insurers and their customers;
to improve customer confidence in the general insurance industry;
to provide better mechanisms for the resolution of complaints and disputes between insurers and their customers; and
to commit insurers and the professionals they rely upon to high standards of customer service.
A summary of the national legislation and codes that provide the regulatory backbone for policyholder protection in the insurance industry is provided on the next page.
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Tab
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Pol
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An
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Leg
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Ind
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Life
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Trad
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A
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Pric
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3.2 Product disclosure
PRODUCT DISCLOSURE REQUIREMENTS:
Financial Services Reform Act 2001
Consumers need clear and relevant product information that is directly comparable to information on other products in the insurance market. This ensures they can make informed decisions on which products best suit their needs. It also helps give the industry a reputation for reliability and honesty.
The most stringent requirements for ensuring appropriate product disclosure are set out in the Financial Services Reform Act 2001 (FSR Act, incorporated in the Corporations Act 2001 – Chapter 7), which builds upon the standards established in the Insurance Contracts Act 1984. The FSR Act disclosure regime applies to most types of insurance with the exception of health insurance, workers compensation and CTP. The FSR Act licensing regime does not apply to APRA-licensed insurers who only have wholesale clients.
In general, the FSR Act requires insurers to give product documentation to consumers before they buy a product. However, they can provide documentation up to five days after issuing risk insurance products but only if the consumer asks for the product to be issued immediately and it is not feasible to give them documentation before issuing the product. Product disclosure documentation must be kept up to date for the lifespan of the product.
The required disclosures include:
a financial service guide that includes information about the services provided, such as details of remuneration, commission, benefits, conflicts of interest and dispute resolution mechanisms;
a statement of advice setting out any personal advice given to a consumer and the basis on which it was given; and
a product disclosure statement (PDS) detailing information on significant benefits and risks of the product, such as its features, expected returns, applicable tax rates, dispute resolution procedures, and the extent to which environmental, social and ethical considerations have been taken into account when making investment decisions.
Telephone sales also fall within the scope of this legislation. Consumers must be:
clearly informed of the importance of using a PDS in making a decision;
given the option of having the PDS read out over the telephone;
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given a PDS before becoming bound to buy a product;
contacted only between 8am and 9pm, excluding Sundays and certain public holidays; and
given an opportunity to be placed on a “no contact” register.
These restrictions apply only to telephone sales to retail clients.
Non-compliance with the FSR Act
Non-compliance with the FSR Act may attract financial penalties or imprisonment for up to five years. ASIC has the power to impose a range of administrative penalties on insurers, including suspension, variation or revocation of their licence.
Insurance Contracts Act
The Insurance Contracts Act places additional disclosure and procedural requirements on general insurers, such as:
detailed requirements pertaining to policy and claim limitations and disclosures;
when arranging a new policy for home or motor insurance, the insurer must ask specific questions associated with the risk to be insured, otherwise the duty of disclosure will be deemed to be waived;
when renewing policies, the insured has a duty of disclosure as to matters that would increase the risk of the insurer;
the insurer must advise the intention and rate of renewal at least 14 days prior to expiry of existing policy, otherwise the policy is automatically renewed with no premium;
an unpaid instalment can prevent claim payment only if this is made clear to the insured and it is overdue by at least 14 days;
building insurance covers purchases until sale completion or possession of the building;
the insured must be informed if liability cover is on a claims-made basis; and
insurers must disclose averaging provisions clearly and in writing.
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3.3 Pricing and competitionThe Trade Practices Act (TPA) 1974 was enacted to address:
anti-competitive and unfair market practices;
mergers and acquisitions of companies;
product safety and liability; and
third-party access to facilities of national significance.
All state and territory governments have their own fair trading and consumer laws that mirror, or are based on the TPA, thereby extending the same principles to workers compensation and CTP insurers. In December 2003, part VII A of the TPA absorbed the prior requirements of the Prices Surveillance Act 1983. The three key functions of this Act were:
to vet proposed prices of any business organisation under prices surveillance;
to hold enquiries into pricing practices and related matters and to report on these findings to the Treasury; and
to monitor prices, costs and profits of an industry or business, again reporting to the Treasury.
MEDICAL INDEMNITY INSURERS
Under the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003, the provision of medical indemnity products has been regulated to require minimum coverage of $5 million on a claims-made basis. Since 1 July 2003, medical indemnity insurers (MIIs) have not been able to offer insurance on a claims-incurred basis. However, by taking out extended reporting benefit policies, which are purchased many years in advance, doctors may be able to avoid buying medical indemnity insurance after retirement.
In 2004, the Australian Government commissioned a study (in consultation with the Australian Medical Authority and medical indemnity providers) to examine options for long-term arrangements for retirement of doctors. As a result, legislation was introduced (effective July 2004) to establish the Run-off Cover Scheme (ROCS) to provide affordable medical indemnity cover to medical practitioners upon retirement.
ROCS is funded by a levy on MIIs, at a rate of 8.5 per cent of premium income for the four years from July 2004. MIIs are then expected to on-charge the levy to practitioners (the “funding levy”), with appropriate disclosure on premium notices.
MIIs receive fees from the Medicare Australia to cover:
claims handling costs for eligible retirement claims;
the cost of issuing practitioner eligibility certificates for ROCS; and
the cost of implementing systems to administer ROCS.
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With effect from 1 July 2003, only registered insurers, including those owned by Medical Defence Organisations (MDOs), are permitted to offer medical indemnity insurance.
HEALTH INSURANCE
The Australian Government closely controls competition in the health insurance industry. While price differentiation is possible within the framework of a community rating scheme, the Government must approve any rise in premium rates that exceeds the Consumer Price Index (CPI) inflation rate. Product differentiation is also limited and levels of coverage are regulated.
Private health insurers are also subject to Lifetime Health Cover (LTHC) legislation, which came into effect on 1 July 2000. Under this law, premiums are held at a base rate for all members joining before the age of 30. Premiums for new policyholders are subject to a two per cent loading for each year after the age of 30. Therefore people who join early in life will be charged lower premiums than people who join later. LTHC is designed to encourage more people to join at a younger age and maintain their membership over their lifetime.
In January 1999, the Australian Government introduced a 30 per cent tax rebate on all health insurance premiums. This rebate applies to all Australians who are eligible for Medicare and are members of a private health fund. Policyholders may obtain this rebate in three ways:
as a lower premium rate;
as a rebate on their annual income tax return; or
as a cash payment from the Medicare office.
Health insurers are responsible for ensuring all policyholders are aware of the rebate and that it is implemented appropriately.
In addition, the Government’s “gap cover” initiatives seek to reduce out-of-pocket expenses incurred by policyholders. Such gap cover schemes offer 100 per cent coverage of a member’s hospital costs when the member is treated in a hospital that has an agreement such as the Hospital Purchasers Provider Agreement, or similar, with the fund.
When the doctor also has an agreement with the hospital, these schemes enable health funds to pay benefits higher than the Medicare Benefits Schedule fee. With these agreements, health funds will be able to provide members with 100 per cent cover, not only for hospital costs but in-hospital medical costs as well. The schemes have been facilitated by the introduction of simplified billing whereby registered doctors and hospitals bill the health fund directly.
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3.4 Sales practice regulationThe FSR Act aims to ensure policyholders get quality sales advice and service by requiring advisers to:
have appropriate skills and knowledge; and
adhere to prescribed conduct and disclosure standards.
SKILLS AND KNOWLEDGE
Under the FSR Act, all providers of financial products or financial advice must hold an Australian Financial Services Licence (AFSL) or be appointed as an authorised representative of a licence holder.
Licence holders are required to:
have documented procedures to monitor and supervise the activities of representatives to ensure they comply with financial services laws;
ensure all representatives who provide financial services are competent to provide those services;
maintain records of all training undertaken;
meet ongoing educational requirements; and
ensure “responsible officers” meet ASIC standards for knowledge and skills. All advisers and representatives giving financial advice must be trained to the standards set out in ASIC’s Policy Statement 146.
CONDUCT AND DISCLOSURE STANDARDS
FSR Act requirements that relate to service standards include the following:
Insurers must confirm, electronically or in writing, the issue, renewal, redemption or variation of policies within a reasonable time frame.
Insurers must offer a 14-day “cooling-off” period during which customers have the right of return. This period starts on the earlier of the following dates: the date the confirmation requirements have been met, or the end of the fifth day after the product is issued or sold to the consumer. For risk insurance products, the amount refunded can be reduced in proportion to the period that has passed before the right of return is exercised.
Consumers must be given the option to register a “no contact, no call” request, similar to marketing consents required under the Privacy Act 1988.
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As AFSL holders, insurers are required to maintain a register of all authorised representatives and ensure that their representatives provide services honestly, efficiently and fairly. Other requirements of the FSR Act relating to policyholder protection include:
compliance measures that are consistent with Australian Standard 3806 on compliance programs (this is the minimum standard, not the only way);
internal procedures for dealing with complaints. These must meet the standards set out in ASIC’s Policy Statement 165; and
procedures for keeping client money in a trust account that is separate from the licensee’s or representative’s own account.
3.5 Ability to pay claimsThere are presently no compensation funds to cover claims against insolvent insurers. The focus in this area is establishing appropriate risk-based solvency standards and appropriate regulatory supervision, which are discussed in detail in Chapter 2.
MEDICAL INDEMNITY ASSISTANCE
The medical indemnity legislation, introduced by the Australian Government in 2002, is designed to contribute towards the availability of medical services in Australia.
The package of legislation allows the Government to provide financial assistance to MDOs and MIIs to help these organisations keep medical indemnity insurance premiums at an affordable level.
The Medical Indemnity Act 2002 enables participating MDOs and MIIs to make claims under four medical indemnity schemes which are administered by Medicare Australia on behalf of the Government.
Incurred But Not Reported (IBNR) – Designed to fund the IBNR liabilities of MDOs where they do not have adequate reserves to cover their liabilities. The Act provides that all MDOs that existed on 30 June 2002 may participate in the IBNR scheme unless the Minister for Revenue determines otherwise. As at October 2005, the Minister had determined that United Medical Protection Limited is the only MDO to participate in the IBNR indemnity scheme.
High Cost Claim Scheme (HCCS) – Enables the Government to fund 50 per cent of the cost of payouts by MDOs and MIIs that are greater than the applicable threshold amount, up to the limit of a practitioner’s indemnity cover.
Run-Off Cover Scheme (ROCS) – A reinsurance run-off vehicle to assist MDOs and MIIs in respect of claims made against a private medical practitioner who has retired, is on maternity leave or has permanently left private medical practice in Australia.
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Exceptional Claims Scheme (ECS) – Designed to assist MDOs and MIIs where settlement amounts of claims exceed a practitioner’s indemnity insurance contract limit.
3.6 Use of personal informationAll private insurance companies and agents became subject to amendments to the Federal Privacy Act from 21 December 2001. The legislation governs collection and use of personal information by most private companies within Australia, via the application of the following 10 National Privacy Principles:
collection;
anonymity;
use and disclosure;
data security;
data quality;
openness;
access and correction;
trans-border data flows;
identifiers; and
sensitive information.
The legislation formalises many existing standards within the insurance industry, such as the General Insurance Information Principles.
Small companies (with turnover of less than $3 million), political parties, government agencies and state and territory authorities are generally excluded from this legislation. However, federal public sector organisations are bound by the National Privacy Principles set out in the Privacy Act.
Compliance with the privacy regulation is monitored by the Privacy Commissioner, who has the authority to impose penalties proportional to the seriousness of the breach.
These include actions such as the pursuit of damages through the federal courts, financial compensation to the policyholder, cessation of activities which led to the breach and public naming of the offender with details of the breach published in the annual report.
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Since 2001, there has been a marked increase in privacy legislation and most states and territories have some form of regulation. For example, New South Wales-based companies are governed by the Privacy and Personal Information Protection Act 1998. Victoria introduced its own Information Privacy Act in 2000 (effective September 2002) and a Health Records Act in 2001 (effective July 2002). All other states and territories have passed legislation or issued statements advocating privacy for all companies based on Commonwealth principles. This patchwork of regulation was acknowledged by the Privacy Commissioner in the 2004–2005 review of the private sector provisions of the Privacy Act which recommended, among other things, clarifying jurisdictional issues.
3.7 Sources of redressComplaints procedures to address any breakdown in policyholder protection are well established across the industry.
Licence holders are accountable for losses suffered by retail clients as a result of the actions of their representatives.
The FSR Act requires all insurance companies to have clearly documented internal dispute resolution procedures for retail clients, and to belong to an external dispute resolution scheme which meets ASIC-approved standards.
GENERAL INSURANCE
Complaints in the general insurance industry are dealt with by the Insurance Ombudsman Service (formerly known as the Insurance Enquiries and Complaints Scheme, established in December 1993). It provides a national dispute resolution service developed by the ICA to handle enquiries and complaints and to resolve disputes between policyholders and insurers. The determination of third-party disputes (i.e. complaints against another person’s insurer) is limited to disputed amounts of $3,000 or less.
The service operates at two tiers. Consumer consultants operate at the first tier to respond to enquiries and encourage resolution of complaints. If a dispute remains unresolved following the tier one processes, it can be referred to the second tier.
At this tier, a panel, referee or adjudicator offers applicants an impartial and authoritative alternative to litigation. Binding determinations can be made by an adjudicator for amounts not exceeding $5,000 and by a panel or referee for amounts not exceeding $150,000 where the claim does not exceed $290,000. A panel or referee may also make recommendations for an amount greater than $150,000 but not exceeding $290,000, where a claim does not exceed $290,000.
The panel determines most disputes but when fraud is alleged, the matter is determined by a referee. Decisions of the scheme are binding on all participating insurers
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where amounts are less than $150,000. However, the scheme can also recommend settlements up to $290,000. ASIC has approved the scheme.
From 1 January 2004, the terms of reference of the scheme were extended to include underwriting agents and MIIs as members. It now also deals with non-claims disputes as well as disputes involving small businesses, classified as retail clients under the FSR Act.
Complaints related to workers compensation and CTP are subject to state and territory procedures in certain circumstances. These include the Motor Accidents Authority, the NSW Workcover Authority, the Transport Accident Commission and the Victorian Workcover Authority.
LIFE INSURANCE
The Financial Industry Complaints Service (FICS) was originally established by the life insurance industry to assist in the resolution of policyholder complaints about insurance policies issued by its members. FICS has the authority to investigate, negotiate and conciliate policyholder complaints against any of its members in the industry. This extends to reinsurers registered under the Life Insurance Act 1995 and authorised representatives and insurance brokers related to the industry. FICS has since expanded to include complaints relating to financial planning, managed investments and stockbrokers.
FICS operates in a manner similar to the Banking Ombudsman. However, it has an independent panel to make determinations, rather than an ombudsman. Any decision can be referred to an adjudicator if less than $10,000 or to a panel if greater than $10,000. Claims can be up to $250,000. The panel is headed by an independent chair and includes industry and consumer representatives. Initially, FICS liaises with both the policyholder and the insurance company to reconcile the differences that gave rise to the complaint. Both parties are expected to abide by the panel’s decision; however, the policyholder cannot be prevented from exercising their legal rights. ASIC has approved the service.
HEALTH INSURANCE
Health insurance complaints are handled by the Private Health Insurance Ombudsman (PHIO), as authorised by the Government. PHIO provides a free service to consumers to assist with health insurance problems and enquiries. It also deals with complaints from health funds, private hospitals or medical practitioners regarding health insurance arrangements.
INSURANCE BROKERS
Insurance Brokers Disputes Limited (IBD) is a free consumer service. Its role is to handle complaints and help resolve problems between insurance brokers and other financial services providers (other than insurance companies) and their clients. It is an ASIC-approved external dispute resolution scheme.
IBD provides support to help resolve problems quickly and efficiently without having to resort to costly litigation. Anyone who has a problem with their insurance broker or financial service provider concerning a general or life insurance policy can contact IBD.
IBD covers a range of policies, including motor vehicle, home building and contents, sickness and accident, life, consumer credit, travel, personal and domestic property, up to a claim limit of $50,000. IBD also handles complaints regarding small business pack policies up to a claim limit of $5,000.
IBD does not handle some cases, such as those already involved in legal proceedings. In addition, IBD does not handle disputes involving claims of more than the limits listed above, except where the insurance broker or financial service provider and its professional indemnity insurer have agreed to waive the limit.
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Developments 86
Framework 92
• Australian Accounting Standards Board 92
• Australian Prudential Regulation Authority 93
• Australian Securities & Investments Commission 95
• Australian Stock Exchange 95
• Private Health Insurance Administration Council 96
• Medicare Australia 96
• Life Insurance Actuarial Standards Board 96
Accounting standards 98
Annual accounts 119
Other returns 122
Key dates 129
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4.1 Developments
AASB 7 FINANCIAL INSTRUMENTS: DISCLOSURE
The single most significant accounting standard development that will impact insurers in 2007 is the application of AASB 7 Financial Instruments: Disclosure (AASB 7). The standard affects every entity with financial instruments and applies to annual periods beginning on or after 1 January 2007.
The requirements expand on existing financial instrument disclosure found in AASB 132 Financial Instruments: Disclosure and Presentation and amends certain disclosure requirements in AASB 4 Insurance Contracts for insurance companies. Some of the additional disclosures are likely to require considerable effort to prepare in 2007 because of the nature of the disclosures and the requirement to also disclose prior year comparatives.
Overview of requirements
This standard impacts all entities, even if their financial instruments are limited to simple instruments such as cash, accounts payable and receivable, investments and borrowings.
It requires entities to disclose their financial risks, including how they are managed, based on information used by key management personnel in performing this function.
Entities are required to measure and disclose the amount by which equity and profit or loss could change from what is reported at the balance sheet date, should market conditions (such as the level of interest rates, exchange rates, commodity, equity or other price risks) move by ‘reasonably possible’ amounts.
The disclosures are required to be included in the financial statements and are subject to audit.
What will these requirements mean for insurers
The conceptual disclosure requirements of AASB 7 and how to prepare for them will be a challenge for many entities.
In order to comply with AASB 7 new data sourcing solutions may be required. This may require new analysis tools or models, which could range from simple spreadsheets to complex risk management tools. Ensuring adequate internal control of these data gathering processes will be an additional challenge.
The AASB 7 requirement to provide quantitative information on the sensitivity of profit and equity, and qualitative information on risk management ‘through the eyes of management’ will result in an unprecedented level of sensitive information
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being publicly available. It will certainly bring transparency to most companies’ risk management issues and companies need to ensure they are fully prepared and messages clearly explained.
Information is reported consistently, including when it is for different purposes, such as financial statement and regulatory disclosures.
In addition, AASB 101: Presentation of Financial Statements has also been amended to require entities to disclose objectives, policies and processes used for managing capital.
PHASE II OF THE IASB’S INSURANCE PROJECT
All Australian companies are required to produce financial statements that comply with Australian equivalents to International Financial Reporting Standards (AIFRS) for reporting periods beginning on or after 1 January 2005. However, the local and global accounting for insurance contracts is still to be fully harmonised.
Due to the numerous and complex treatments adopted by insurers around the world, the International Accounting Standards Board (IASB) decided that international convergence on accounting for insurance contracts would not be achieved within the time scale set for adoption of the other International Financial Reporting Standards (IFRS).
As a result, the IASB’s Insurance Project was split into two phases. The objective of Phase I was to produce an international standard defining an insurance contract, make limited improvements to accounting practices (while grandfathering most of the current territory treatments) and provide insights into the key risk drivers and sensitivities of insurance contracts through improved disclosures.
Phase II aims to address the broader conceptual and practical issues related to insurance accounting, with a particular focus on the measurement of transactions arising from insurance contracts.
Phase I
Phase I was completed on 31 March 2004 when the IASB issued IFRS 4 Insurance Contracts. In Australia this was replicated by the Australian Accounting Standards Board’s (AASB) release of a new standard, AASB 4 Insurance Contracts, and a revision of the Australian insurance standards already in place resulting in AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. The update of these standards incorporated some of the recommendations arising from the HIH Royal Commission and meant that policies issued by registered health benefits organisations (RHBOs) were considered as general insurance contracts.
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Australia had one of the leading-edge accounting frameworks for insurance in the world, and already had a focus on market value accounting for insurance business. As a result the measurement impacts arising from Phase I were relatively modest.
Phase II: Time scale
Phase II was restarted upon completion of phase I and the IASB set up an Insurance Working Group to advise them on the project. A discussion paper was released in early May 2007, outlining the IASB’s preliminary views on the proposed enhancements to accounting for insurance contracts.
The next stage will be to produce an exposure draft of a new standard based on submissions and industry feedback on the paper. This is expected to take at least 18 months from the release of the discussion paper and the final standard is not anticipated for at least another 12 months after that. It is likely therefore that the international standard on accounting for insurance contracts will not be released until the first half of 2010 at the earliest.
When the IASB issues the accounting standard arising from phase II, the AASB will replace AASB 4, AASB 1023 and AASB 1038 with a single insurance accounting standard that is harmonised with the IASB standard.
Phase II: Discussion paper
The IASB is seeking comments by 16 November 2007 on all matters of insurance accounting that are covered in its discussion paper. The IASB has stated that the paper contains its preliminary view on insurance accounting and will modify or confirm these views on the basis of the responses.
The paper deals with accounting for insurance liabilities and insurance assets. It does not consider the definition of insurance contracts as these were dealt with in Phase I. It raises a number of specific questions for which the IASB is seeking comment. Some of the key features of the discussion paper include:
The proposed basis of measurement for insurance liabilities would involve the use of central estimates, discounting and the adoption of risk margins. The nature of risk margins is different to what the general and health insurance industry is currently applying. In addition, the proposed discount rates would refer to current market discount rates and not the risk-free rates currently required by AASB 1023.
Risk margins would be determined for a portfolio of insurance contracts that are subject to broadly similar risks and are managed together as a single portfolio. Risk margins would not be able to reflect the benefits of diversification between portfolios (diversified benefits are currently allowed in Australia).
Acquisition costs would be expensed as incurred, rather than deferred over the life of the insurance contracts (different from AASB 1023, AASB 1038 and AASB 118 Revenue).
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Reinsurance assets would need to include a discount to allow for the probability of losses from default or disputes.
The IASB is undecided as to whether an insurer should present premiums as revenue or as deposit receipts.
The IASB is undecided as to whether it should address any accounting mismatches between the fair value through profit or loss value of assets backing unit-linked contract liabilities and the liabilities which are measured using a current exit value basis (the current exit value basis is the estimated valued for which the risk and obligations of the portfolio would be transferred to another entity).
The impacts above will present some disclosure challenges to insurers.
The discussion paper will be the subject of a presentation by the IASB and an education session by the FSAA during June 2007. Given that Australian insurers have been fair value accounting for insurance assets and liabilities for a while, players in the industry are well placed to make submissions to the IASB should they desire.
Phase II: Convergence
The IASB has stated that an important priority of the insurance project is convergence with US standards, wherever possible and when feasible under the IASB conceptual framework, and consistency with other IASB projects (such as the Revenue Project).
The US standard setter, the Financial Accounting Standards Board (FASB) has expressed an interest in participating in a “modified joint project” in respect of insurance. This would mean that, following analysis of the comments received on the phase II discussion paper, the IASB and the FASB would undertake a joint project with the objective of issuing identical or substantially similar standards.
THE FAIR VALUE OPTION AND ASSETS BACKING INSURANCE LIABILITIES
The initial AASB 139 Financial Instruments: Recognition and Measurement (issued July 2004) included a free choice option to designate any reliably measurable financial asset at fair value through profit or loss.
The July 2004 versions of AASB 1023 and AASB 1038 compelled insurers to take this option for financial assets they had determined as backing their insurance liabilities.
However, in response to feedback from, amongst others, the European Central Bank and the European Commission, the IASB, and consequently the AASB, introduced restrictions on the ability to designate financial assets as fair value through profit or loss.
Amendments made in June 2005 (and effective for accounting periods beginning on or after 1 January 2006) now only permit designation when doing so results in more relevant information because either:
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it eliminates or significantly reduces an accounting mismatch that would arise from measuring assets or liabilities (or recognising the gains and losses on them) on different bases; or
the instrument forms part of a group of financial assets and/or financial liabilities that are managed on a fair value basis in accordance with a documented risk management or investment strategy and information about the group is provided internally on that basis to the entity’s key management personnel.
For insurers the first reason for designation is the most often cited because of the allowance to continue to manage their assets backing insurance liabilities on a fair value basis under AASB 1023 and AASB 1038.
Note that this does not affect the treatment of those financial assets that are classified as held for trading (i.e. acquired principally for the purpose of selling or repurchasing in the near term, or are part of a portfolio for which there is evidence of recent short-term profit taking) as these are automatically designated as fair value through profit and loss.
REGULATORY VERSUS FINANCIAL REPORTING UNDER AIFRS FOR LIFE INSURERS
Prior to the transition to AIFRS, APRA-regulated life insurers in Australia had enjoyed the efficiency of preparing annual financial reports under a combined reporting regime that included the requirements of the Life Insurance Act 1995 (the Life Act), APRA prudential rule No. 35 (PR 35), the Corporations Act 2001, Australian accounting standards and other financial reporting pronouncements.
The move to AIFRS, however, created differences between the regulatory reporting to APRA (under PR 35 and the Life Act) and financial reporting to the Australian Securities and Investments Commission (ASIC), under the Corporations Act and AIFRS. In response, APRA released updated prudential rules and actuarial guidelines that bring the measurement basis for regulatory reporting more in line with AIFRS.
Since the transition to AIFRS there has been a stable platform in relation to financial reporting, with many insurers having experienced two year ends under the new regime. There is no clear standard within the industry in relation to the presentation of financial statements. Whilst information from the PR 35 is not required to be disclosed in AASB 1038 financial statements, there are a number of insurers that continue to include this information.
REGULATORY VERSUS FINANCIAL REPORTING UNDER AIFRS FOR GENERAL INSURERS
APRA has issued two consultation packages outlining its proposed prudential response to the adoption of AIFRS by general insurers.
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These cover fair value measurement and proposals to de-couple the definition of capital instruments eligible for Tier 1 Capital from Australian accounting standards and to bring its approach to innovative capital instruments into line with international practice.
Changes to the prudential standards for general insurers will be introduced following implementation of stage 2 prudential standards, dealing with capital assets in Australia and custodian arrangements. These reforms took effect in late 2006.
APRA STAGE 2 GENERAL INSURANCE REFORMS
As mentioned in Chapter 2, APRA has released a set of new prudential standards as part of stage 2 of its general insurance reforms. The financial reporting impacts of these new standards are described in more detail in chapter 2. These include the financial reporting declaration (FRD), the external peer review of the insurance liability valuation report (ILVR) and the approved actuary’s financial condition report (FCR).
PHIAC returns
New PHIAC reporting requirements
For reporting after the March quarter 2007, PHIAC have issued revised templates for PHIAC 1, PHIAC 3 and PHIAC 4. A revised PHIAC 2 template is expected to be issued as well.
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4.2 FrameworkInsurers’ financial reporting is governed by the Corporations Act, regulatory requirements and, where an insurer or its parent is listed on the Australian Stock Exchange (ASX), the listing rules. The pronouncements of the Life Insurance Actuarial Standards Board (LIASB) also affect the preparation of financial statements by life insurance companies. The responsibilities of each of these bodies drive the financial reporting requirements and are summarised below. The inter-relationship between the bodies is illustrated in Figure 4.1.
The Corporations Act contains no reporting requirements that are specific to insurers. Chapter 2M of the Act, relating to financial reports and audit, is applicable to insurance companies. Importantly, Section 296 requires companies to prepare their financial reports in accordance with accounting standards and to give a true and fair view (Section 297). Accounting standards are issued by the AASB under Section 334 of the Corporations Act, and there are now three specific standards in relation to the insurance industry, two of which have been revised and reissued as part of the adoption of AIFRS:
AASB 4;
AASB 1023; and
AASB 1038.
It should be noted that some RHBOs are not structured as companies and hence are not governed by the Corporations Act. Their governing legislation is typically state or territory-based, however, they are also required to prepare financial statements in accordance with AASB standards.
AUSTRALIAN ACCOUNTING STANDARDS BOARD
The AASB is constituted under Section 226 of the Australian Securities and Investments Act 1989. It is overseen by the Financial Reporting Council, which is responsible for appointing members of the AASB and determining its priorities and overall direction. The council cannot direct the AASB in relation to the issuing of a particular standard.
The AASB’s primary responsibility is to develop accounting standards in general purpose financial reporting. The objective of general purpose financial reporting is to “provide information useful to users for making and evaluating decisions about the allocation of scarce resources”.
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Users are broadly divided into three groups:
Resource providers;
Recipients of goods and services; and
Parties performing a review or oversight function.
Management and regulatory bodies, such as APRA and PHIAC, are excluded from these user groups as they have the power to determine the form and content of information to be provided to them in special purpose financial reports.
Hence, the AASB is not required to consider the interests of APRA or PHIAC in determining general purpose financial reporting requirements, although the interests of policyholders, as recipients of services and providers of capital, must be considered.
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Life insurance
APRA develops financial reporting requirements in line with its responsibilities to policyholders. To meet the financial reporting requirements of the Life Act, life insurers are required to comply with PR 35, and friendly societies that are life insurers are required to comply with prudential rule No. 47 (PR 47).
The PR 35 prescribes the format of regulatory financial statements for life companies. The new PR 35, issued 16 December 2005, incorporates changes to regulatory financial statements as a result of the introduction of AIFRS, and updated actuarial standards. Changes were also incorporated into the PR 26 – collection of statistics, including the introduction of an additional form for Credit Risk.
Friendly societies
Friendly societies are required to produce general purpose financial statements in accordance with AASB 1038, however, APRA continues to maintain separate rules for friendly societies’ reporting to APRA. Accordingly, APRA has updated prudential rules PR 47 and PR 48. The revised prudential rules have applied for reporting periods ending on or after 31 May 2006. Similar to the PR 35, the PR 47 prescribes the format of regulatory financial statements for friendly societies, whilst the PR 48 governs the collection of statistics. The updated PR 47 and PR 48 incorporate changes to regulatory financial statements as a result of the transition to AIFRS.
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General insurance
The current regulatory regime for general insurers results in major differences between the reporting requirements of APRA and those under the Corporations Act. The recognition of premium liabilities under GPS 310 Audit and Actuarial Reporting and Valuation differs from AASB 1023 General Insurance Contracts. In addition, it is possible that company directors could elect to adopt a different prudential margin for Corporations Act reporting from that prescribed by the APRA prudential standards. Consequently, the results of insurers reflected in annual audited Insurance Act returns differ from the general purpose financial report prepared under the Corporations Act. See Table 4.5 below for more details of the differences between the two regimes.
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
ASIC enforces and regulates company and financial services laws to protect consumers, investors and creditors.
The Australian Securities and Investments Commission Act 2001 requires ASIC to:
uphold the law uniformly, effectively and quickly;
promote confident and informed participation by investors and consumers in the financial system;
make information about companies and other bodies available to the public; and
improve the performance of the financial system and the entities within it.
ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit.
ASIC regulates companies and financial services, and promotes investor, creditor and consumer protection under the Australian Securities and Investments Commission Act; Corporations Act; Insurance Act 1973; Insurance Contracts Act 1984; Superannuation (Resolution of Complaints) Act 1993; Life Act; Retirement Savings Accounts Act 1997; and the Superannuation Industry (Supervision) Act 1993.
AUSTRALIAN STOCK EXCHANGE
The ASX is a private, profit-making entity that is responsible for managing Australia’s primary securities market. The ASX is responsible for establishing listing rules and business rules for companies and stockbrokers respectively. As a listed entity, the ASX is also subject to the listing rules. In response to recent corporate collapses, the ASX Corporate Governance Council has developed a set of guidelines, Principles of Good Corporate Governance and Best Practice Recommendations. This document articulates
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10 core principles that the Council believes underlie good corporate governance. Each principle is explained in detail and implementation guidance is provided in the form of best practice recommendations.
A listed entity must lodge the information set out in Appendix 4E of the listing rules (preliminary final report) with the ASX. The information must be given to the ASX immediately as it becomes available and no later than when it lodges any accounts with ASIC or the regulatory bodies in the jurisdiction in which it is established. The information must be lodged no later than two months after the end of the accounting period. All listed entities must also give their annual report to the ASX when they lodge them with ASIC. Listed entities must also give the ASX a copy of any concise report at the same time.
PRIVATE HEALTH INSURANCE ADMINISTRATION COUNCIL
PHIAC is an independent statutory authority that regulates the private health insurance industry. PHIAC administers the reinsurance arrangements, collects and publishes industry statistics, administers the simplified billing arrangements and monitors the solvency and capital adequacy of private health insurers. All health insurance funds must provide PHIAC with returns prepared in accordance with the guidelines set out in PHIAC circulars. The guidelines state that the accounts and returns should comply with Australian accounting standards.
Private health insurance policy is set down by the Commonwealth Department of Health and Ageing.
MEDICARE AUSTRALIA
Medicare Australia is responsible for the administration of the Medicare system and the Australian Government’s 30 per cent Rebate scheme, which sees persons eligible for Medicare benefits reimbursed with a percentage of any private health insurance premiums paid to a RHBO. Many RHBOs will administer this rebate on behalf of their members and claim reimbursement directly from Medicare Australia.
LIFE INSURANCE ACTUARIAL STANDARDS BOARD
The LIASB was established under the Life Act, which is administered by APRA. Members are appointed by the Federal Treasurer and comprise a chairperson, a government member and not more than five other members. All but one must be members of the Institute of Actuaries of Australia (IAA).
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The current board members are:
Clive Aaron;
Greg Martin;
Bill Bartlett (non Actuary member);
Graham Slater;
Tim Jenkins (Chairman);
Carl Stephenson; and
Tom Karp (Government member).
The actuarial standards required under the Life Act cover:
Cost of investment performance guarantees (Section 42[4b]);
Solvency (Section 65[1]);
Capital adequacy (Section 70[1]);
Value of policy liabilities (Section 114[2]);
Minimum surrender values (Section 207[4]); and
Minimum paid-up values (Section 209[3]).
The actuarial standards have been harmonised with the standards for friendly societies established when the latter were brought under the Life Act. They also include risk-based capital requirements for the shareholder funds of life insurance companies and the management funds of friendly societies. The standards are:
AS1.04 Valuation of Policy Liabilities;
AS2.04 Solvency Standard;
AS3.04 Capital Adequacy Standard;
AS4.02 Minimum Surrender Values and Paid-up Values;
AS5.02 Cost of Investment Performance Guarantees;
AS6.03 Management Capital Standard; and
AS7.02 General Standard.
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4.3 Accounting standards
GENERAL INSURANCE
Australian general insurers are required to prepare financial statements that comply with AIFRS.
AASB 4 Insurance contracts, defines what constitutes an insurance contract.
AASB 1023 General Insurance Contract defines a general insurance contract (i.e. an insurance contract that is not a life insurance contract as defined in the Life Act), and a non-insurance contract (a contract regulated by the Insurance Act that does not meet the AASB 4 Insurance contracts definition of insurance).
AASB 1023 prescribes accounting treatment for:
General insurance contracts (including general reinsurance contracts) that a general insurer issues and to general reinsurance contracts that it holds;
Certain assets backing general insurance liabilities;
Financial liabilities and financial assets that arise under non-insurance contracts; and
Certain assets backing financial liabilities that arise under non-insurance contracts. The treatment of the remaining balances, transactions and operations of a general insurer are prescribed by the AIFRS applicable to these transactions or balances.
The following figure illustrates the key accounting standards for general insurance activities.
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Figure 4.2 – Key AIFRS reporting standards for general insurers
AIFRS introduced few fundamental changes in the treatment of insurance transactions as territory requirements were essentially grandfathered by the IASB until the completion of phase II of its Insurance Project. However, a significant amount of extra disclosure is required that attempts to give the user “insights into the key risk drivers and sensitivities” in respect of insurance contracts.
The key principles and disclosure requirements of AASB 1023, and any departures from the previous version, are described below.
The standard is comprehensive in dealing with many accounting issues, including:
Definition of insurance risk;
Definition of an insurance contract;
Definition of premium revenue and earning pattern;
Measurement of outstanding claims;
Explicit risk margins;
Fair value accounting of investments backing general insurance liabilities;
Deferral of acquisition costs and liability adequacy testing for unearned premiums;
Accounting for inwards reinsurance;
Portfolio transfers within a group;
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Applies to balancessuch as goodwill and intangibleassets for acquiredbusiness
Applies to contractsregulated asinsurance contractswhich no longermeet the definitionper AASB 4Prescribes theaccountingtreatment offinancial assets and liabilities
Reporting of General Insurance Activities
InsuranceContracts
FinancialInstruments:Recognitionand Measurement
e.g. AASB 138Intangible Assets& AASB 136Impairment ofAssets
AASB 7FinancialInstruments
General InsuranceContracts (issuedJuly 2004 andupdatedSeptember 2005)
Australianequivalent ofIFRS 4 InsuranceContractsApplies to insurance contactsnot captured byAASB 1023 orAASB 1038 such as fixed-fee service contracts, e.g. roadsideassistance
Applies to generalinsurance contractswhich meet thedefinition perAASB 4Enhanceddisclosurerequirementsrelating to generalinsurance contractsCertainmodifications toaccounting forgeneral insurancecontracts
Applies to all entitiesEnhanceddisclosers onfinancial risks andnow managed
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Non-insurance contracts; and
Financial statement disclosure principles and requirements.
Definition of an insurance contract
AASB 4 and AASB 1023 include a definition of an insurance contract. An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
Insurance risk
Insurance risk is risk other than financial risk. Financial risk is defined as the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.
Significant risk
Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.
A contract that transfers financial risk alone, or only insignificant amounts of insurance risk, is treated under AASB 139, to the extent that it gives rise to a financial asset or financial liability.
General insurance contracts
AASB 1023 deals with those contracts that meet the definition of a general insurance contract. General insurance contracts are defined as insurance contracts that are not life insurance contracts i.e. insurance contracts that are not governed by the Life Act.
Definition of premium and earning pattern
The revised AASB 1023 clarifies the measurement of premium revenue. Premium revenue comprises premiums from direct business (including underwriting pools written by the entity) and premiums from reinsurance business (including underwriting pools written by other members of the pool). They cover anticipated claims, reinsurance premiums, administrative, acquisition and other costs, and a profit component.
Premium revenue includes fire service levies collected from policyholders as there is no direct nexus between fire brigade charges and the levy that insurers charge policyholders. The fire brigade expense is brought to account in accordance with the earning of the premium to which it relates.
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In contrast, stamp duty and the Goods and Services Tax (GST) effectively represent collection of tax on behalf of the government and are therefore not included as revenue of the insurer.
Premium revenue is recognised from the risk attachment date in accordance with the pattern of the incidence of risk. The revised AASB 1023 provides additional guidance on how the pattern of the incidence of risk is determined. Premiums received in advance are recognised as part of the unearned premium liability. Unclosed business is estimated and the premium relating to unclosed business included in premium revenue. Premium revenue is only recognised as income when it has been earned, which is in proportion to the incidence of the risk covered over the life of the insurance contract.
Measuring premium revenue involves:
Estimating the total amount of premium revenue;
Estimating when claims are expected to occur, and hence estimating the pattern of risk exposure, which provides the earning pattern; and
Recognising the premium when it is earned.
For most contracts the period of the contract is one year and the exposure pattern of the incidence of the risk will be linear. For some reinsurance contracts written on a “risk attaching” basis, a 12-month contract may result in up to 24 months of exposure.
The insurer must also recognise a liability item on the balance sheet for the unearned premium, where this exists.
Measurement of outstanding claims
The revised AASB 1023 requires that the liability for outstanding claims “… shall be measured as the central estimate of the present value of expected future payments for claims incurred with an additional risk margin to allow for the inherent uncertainty in the central estimate”. The previous standard did not require a central estimate of the expected payments and there was no mention of an explicit risk margin.
Expected future payments include amounts related to:
Unpaid reported claims;
Claims incurred but not reported (IBNR);
Adjustments in light of the most recently available information for claims development and claims incurred but not enough reported (IBNER); and
Claims handling costs.
The liability for outstanding claims ought to reflect the amount that, if set aside at balance date, would accumulate to enable payment of claims as they fall due. The standard requires that outstanding claims should be discounted to net present
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value unless the claims are to be settled within a year and the discounting would not have a material impact. While it does require outstanding claims in all classes of business to be discounted, it recognises that such discounting will have significant application to “long tail” classes of business (mainly liability, Compulsory Third Party (CTP) and workers compensation) where a high proportion of such claims are settled outside a 12-month period.
The revised AASB 1023 requires that the discount rate or rates selected should be “risk- free rates that are based on current observable, objective rates that relate to the nature, structure and term of the outstanding claims liabilities…typically government bond rates”. The former AASB 1023 required discount rates to be determined by reference to market-determined, risk-adjusted rates of return appropriate to the insurer.
The revised standard requires that expected future payments should account for future claim cost escalation created by inflation and superimposed inflation. Superimposed inflation is defined as the level of inflation in excess of normal economic inflation indices. The disclosure of superimposed inflation assumptions differs between companies. Some companies make explicit disclosures while others include superimposed inflation within composite inflation assumptions.
Regulatory valuation
GPS 310 sets out the requirements for the valuation of the insurance liabilities for regulatory reporting. Where an insurer’s board decides not to accept the approved actuary’s valuation of insurance liabilities or to adopt a valuation (higher or lower) not in accordance with the principles of this standard, details should be included in the insurer’s published annual financial report.
For the main differences in treatment between financial reporting and APRA regulatory reporting, see Table 4.5.
Explicit risk margins
Under AASB 1023, an additional explicit risk margin is required to be included as part of the outstanding claims liability. The margins are set with regard to the robustness of the valuation models, available data, past experience and the characteristics of the classes of business written. For outstanding claims, since the risk margin is applied to the net liability, the risk margin should also allow for uncertainty in reinsurance and other recoveries due.
Similar to the APRA requirements, risk margins can allow for diversification. The risk margin for the entire company can then be allocated to individual classes of business.
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Assets backing general insurance liabilities
Those assets that a general insurer designates as backing general insurance liabilities are to be measured at fair value where this is permitted by the relevant standard pertaining to that asset. This means that financial assets are valued at bid price excluding realisation costs.
AASB 1023 does not define the expression “assets backing general insurance liabilities” and requires general insurers to disclose the process used to determine which assets back general insurance liabilities.
See the Developments section in this chapter for details of the restrictions in designation of financial assets at fair value through profit and loss.
Deferral of acquisition costs and liability adequacy test for unearned premium
AASB 1023 requires that acquisition costs, including commission and brokerage paid, incurred in obtaining and recording insurance policies shall be deferred and recognised as an asset if it is “…probable that they will give rise to premium revenue that will be recognised in the income statement in subsequent reporting periods”.
AASB 1023 also requires the application of a LAT to the unearned premium liability. If the present value of the expected future cash flows relating to future claims arising from the current contracts plus an additional risk margin exceed the unearned premium liability less related intangible assets and related deferred acquisition costs, then the entire deficiency shall be recognised, first by writing down any intangible assets and then DAC. If additional liability is required it is recognised as an unexpired risk liability. This treatment differs from the previous standard, where only the DAC asset was written down.
General insurers are permitted to use a probability of adequacy that is different to that to be used for outstanding claims, provided that the reasons for using a different rate are disclosed. The LAT shall be performed at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio.
Inwards reinsurance
The revised AASB 1023 requires that inwards reinsurance business should be accounted for in line with the general principles established for direct business. Essentially, the standard requires companies underwriting inwards reinsurance to take responsible steps to estimate and bring to account “unclosed premiums” and to recognise such premiums as earned, having regard to the spread of risk of underlying policies ceded under inwards reinsurance treaties. On the claims side, the standard requires inwards reinsurance business to be accounted for in a similar manner to direct business.
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Outstanding claims should have regard to IBNRs and future claims development, and also be discounted to their net present value. The standard allows reinsurers some latitude. It requires compliance only when the information received is reasonably reliable.
Non-insurance contracts
Contracts that are regulated under the Insurance Act that fail to meet the definition of insurance risk described above are referred to as non-insurance contracts. Financial assets and liabilities arising from such contracts are to be treated according to AASB 139.
Similarly to assets backing insurance liabilities described above, the financial assets and liabilities arising from non-insurance contracts are required by the revised AASB 1023 to take the fair value option under AASB 139, where this is permitted.
Portfolio transfers within a group
Where the responsibility in relation to claims on transferred insurance business remains with the transferring insurer, the transfer shall be treated as reinsurance. As such, the acquiring insurer agrees to meet the claims. However, the contractual responsibility of the original insurer remains.
Disclosure requirements
The VALUE AIFRS General Insurance Australia (November 2005 update) publication produced by PricewaterhouseCoopers provides an illustrative example of the primary statements and key note disclosures for a general insurer under the revised AASB 1023, and other applicable AIFRS.
The revised AASB 1023 incorporates extensive additional disclosures in respect of accounting policies, sensitivities to key assumptions, risk exposures and risk management. The additional disclosure requirements are summarised below.
Income statement
The income statement should include:
The underwriting result (net premium less net claims and underwriting expenses).
Net claims incurred (showing gross undiscounted, reinsurance recoveries undiscounted, the effect of discounting and a split of risks borne in the current period and reassessment of old risks).
Any deficiency arising from LAT (showing write down of DAC, write down of intangibles and additional unexpired risk provision recognised).
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Balance sheet
Balance sheet disclosures should include:
Outstanding claims liability (quantifying central estimate and risk margin).
Risk margin (including the percentage applied, probability of adequacy it achieves and process used to determine it).
Process used for determining assets backing insurance liabilities.
Non-insurance contracts (nature of contracts and assets, liabilities, income, expense and cash flows arising from them).
Segmental information (per AASB 114 Segmental Reporting, geographical split based on location of the insured risks).
Insurance contracts – Explanation of recognised amounts
Other disclosures include:
Accounting policies.
Assets, liabilities, income, expense and cash flows arising from insurance contracts.
Gains and losses recognised on buying reinsurance.
Key assumptions (quantification and process used to determine them).
Effect of changes in assumptions (including quantification of impact of each material assumption change).
Reconciliations of changes in insurance liabilities and related items.
Insurance contracts – Amount, timing and uncertainty of cash flows
Other disclosures include:
Risk management objectives and policies for mitigating risk.
Description of insurance risk pre and post mitigation via reinsurance.
Sensitivity of profit and equity to changes in variables in respect of insurance risks.
Concentrations of insurance risk.
Claims development (showing development of claims estimates, goes back to date of loss of any material claim that still has uncertainty over amount and timing of cash flow, not greater than 10 years).
Terms and conditions of material insurance contracts.
Information in respect of interest rate risk and credit risk.
Exposures to interest rate risk or market risk under embedded derivatives.
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Interaction with regulatory reporting
Additionally, GPS 110 Capital Adequacy for General Insurers requires the following to be disclosed in respect of capital adequacy in the financial statements:
a) The amount of eligible Tier 1 Capital, with separate disclosure of items specified in GGN 110.1 Measurement of Capital Base;
b) The aggregate amount of any deductions from Tier 1 Capital;
c) The amount of eligible Tier 2 Capital, with separate disclosure of items specified in GGN 110.1;
d) The aggregate amount of any deductions from Tier 2 Capital;
e) The total capital base of the insurer derived from the items (a) to (d) above;
f) The minimum capital requirements (MCR) of the insurer; and
g) The capital adequacy multiple of the insurer (item (e) divided by item (f)).
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LIFE INSURANCE
AASB 1038 Life Insurance Contracts prescribes the accounting treatment for life insurance contracts. It also mandates the use of certain options available in other accounting standards. The following figure highlights the key accounting standards for life insurers.
Figure 4.3 – Key AIFRS reporting standards for life insurers
Under AIFRS, the revised AASB 1038 applies to life insurance contracts (and reinsurance contracts), certain aspects of accounting for life investment contracts and to certain assets backing life insurance liabilities or life investment contract liabilities. The accounting requirements for all other assets, liabilities, revenues and expenses of a life insurance company are set out within other standards. The elements of life investment contracts which are not set out in AASB 1038 are prescribed in the new standards AASB 118 Revenue and AASB 139.
Insurance contract
An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
AASB 7FinancialInstruments
Applies to all entitiesEnhanceddisclosers onfinancial risks andnow managed
Financial Reporting of Life Insurance Activities
(issued July 2004and updatedSeptember 2005)Life InsuranceContracts
FinancialInvestments
Revenuee.g. AASB 138Intangible Assets& AASB 136Impairment ofAssets
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Life investment contract
A life investment contract means a contract which is regulated under the Life Act but which does not meet the above definition of a life insurance contract in the revised AASB 1038 and similar contracts issued by entities operating outside Australia.
Friendly societies that issue life insurance contracts are required to comply with AASB 1038.
AASB 1038 addresses key accounting issues by requiring:
profits to be recognised appropriately over the life of an insurance contract in line with the services provided;
calculation of best estimate policy liabilities; and
application of fair value principles.
Table 4.1 – Key principles – Life insurance contracts
Principle Requirement
Basis for valuing policy liabilities Policy liabilities are calculated as the present value of the best estimate of expected future net cash flows, plus future profit margins
Basis for valuing investments backing life insurance contract liabilities
Investments are valued at fair value through profit or loss where permitted
Basis for valuing controlled entities Controlled entities are no longer valued at net market value; however, in accordance with AASB 127 Consolidated and Separate Financial Statements, there is a choice of accounting at cost or fair value
Deferral of acquisition costs Deferred and amortised over the period of expected benefit. DACs are to be deducted from policy liabilities
Recognition of embedded value Not recognised
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Table 4.2 – Key principles – Life investment contracts
Principle Requirement
Basis for valuing policy liabilities Valued at fair value in accordance with AASB 139. In practice, this will likely be on an accumulation basis, but may be adjusted to take account of demand deposit features
Basis for valuing investments backing life investment contract liabilities
Investments are valued at fair value through profit or loss where permitted
Deferral of acquisition costs Only those costs which are incremental and directly attributable to securing the life investment contract can be deferred. This will be recognised as a separate asset and will be tested for impairment at each balance date
Recognition of embedded value Not recognised
Profit recognition – Life insurance contracts
Planned profit margins and life insurance contract (referred to as policy liabilities) are calculated separately for each related product group using best estimate assumptions at each reporting date. Profit margins are released over the financial year during which services are provided and revenues relating to those services are received. The balance of the planned profits is deferred by including the amount in the value of policy liabilities. The revised AASB 1038 requires the use of the prospective method (projection basis) to value policy liabilities (including planned profit margins and other components) at each reporting date unless, using the retrospective method (accumulation basis), the results are not materially different. To ensure planned margins are recognised during the financial year in which the relevant services are provided, policy liabilities include a component relating to those margins.
This methodology, which is commonly known as the “margin-on-services” method, results in reported shareholders’ profits comprising:
The release of planned profit margins on policies in force at the beginning of the year;
The release of planned profit margins on new business written during the year;
The impact of differences in assumed and actual experience during the year including mortality, disability, expenses, lapses, inflation, taxation, reinsurance and investment returns;
Loss recognition (or reversal of past recognised losses) as appropriate; and
Investment earnings on shareholders’ capital and retained profits.
Changes in the assumptions underlying the policy liabilities are spread over future years during which the services to policyholders are rendered, except those for groups of related products on which future losses are expected. The effect of a change to assumed discount rates caused by changes in investment market conditions or where calculation errors occur results in a revenue or expense being recognised in the current financial year.
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The income statement includes all premium and policy-related revenue, investment revenue, fair value gains and losses, all claims (including surrenders), and all expenses and taxes, whether they relate to policyholders or shareholders. The change in the value of policy liabilities (including the change of unvested policyholder benefits and discretionary additions/bonuses vested in policyholders during the financial year) is shown as an expense before arriving at the shareholder profit.
Valuation of life insurance policy liabilities
Under the best estimate method, the liability is calculated as the present value of expected future benefit payments, plus expenses, less future receipts. The following factors are considered to be material to the calculations:
Investment earnings;
Inflation;
Taxation;
Expenses;
Mortality and morbidity reinsurance; and
Policy discontinuance.
The best estimate liability will normally be determined using projection methods, and the value of future profits calculated as the present value of future profit margins.
A profit margin is determined using a profit carrier, which is a financially measurable indicator of either the expected cost of the services provided to the policyholder or the expected income relating to the services.
Profit carriers are selected and profit margins determined at policy commencement to enable an appropriate emergence of profit over the term of the benefits or services provided. The selection of a profit carrier is critical in determining the timing of profits released. More than one profit carrier may be selected for a product, although the practical implications of selecting multiple carriers should be considered relative to the materiality of the results. Typical profit carriers are identified in the following table.
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Table 4.3 – Profit carriers for life insurance contracts
Product Profit carrier
Yearly renewable term Premiums or claims
Level premium term Claims
Group life Premiums or claims
Disability income Claims
Immediate annuities Annuity payments
Traditional non-participating Death claims
Traditional participating Value of bonuses
Profits or losses may emerge on acquisition depending on whether establishment fees are more or less than the related expenses. Losses may also emerge if expected future income is not considered adequate to cover acquisition expenses.
Changes in assumptions which directly affect profit in the year in which they occur are:
Changes in the investment earning rate due to a change in market conditions; and
Changes that lead to capitalised losses or reversal of previous capitalised losses.
All other changes in best estimate assumptions result in the profit margin being recalculated. This results in future profits calculated using the revised best estimate assumptions re-spread in accordance with the profit carrier. When expected future losses are identified at a reporting date, these are recognised as an immediate loss at that date.
A record of cumulative losses is kept for each related product group and profit margins are maintained at zero until cumulative losses are fully reversed.
Revenue recognition – Life investment contracts
Revenue from investment contracts arises either from explicit fees charged to investment contract holders or from the earning of the management services elements (MSE) inherent in the valuation of the investment contract liability.
Explicit fees are measured as the fair value of the consideration received or receivable and are earned in the income statement as the services are provided to the contract holder. This would normally be on a straight line basis over the life of the investment contract but other earning patterns may be more appropriate if they better reflect the provision of services.
A MSE arises when the sum of consideration received or receivable exceeds the fair value of the investment contract liability upon initial recognition. This deferred revenue is recognised as a liability on the balance sheet and earned as the management services are provided, as per the explicit fees above.
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Incremental costs that are directly attributable to the acquisition of an investment contract are recognised as an asset if: they can be identified separately; measured reliably; and if it is probable that they will be recovered.
An incremental cost is one that would not have been incurred if the life insurer had not acquired the life investment contract. The asset represents the insurer’s contractual right to benefit from providing ongoing services, and is amortised as the insurer recognises the related revenue.
Valuation of investment contract liabilities
Investment contract liabilities are valued at fair value in accordance with AASB 139. As there is generally no active market for investment contract liabilities, these should be valued using an appropriate valuation technique which would normally involve a discounted future cash flow analysis.
For investment contracts with a demand feature, or surrender value, AASB 139 stipulates that the fair value of the liability cannot be less than the current surrender value.
Accounting for investments
AASB 1038 requires life insurers to measure all assets backing life insurance and life investment contracts at fair value through profit or loss as at the reporting date where this option is available. Changes in the fair value must be recognised in the income statement as either income or expenses in the financial year in which the changes occur. Where there are choices available in other standards for the measurement of assets, AASB 1038 requires the following to be applied, to those assets determined as backing life insurance and life investment contracts.
Table 4.4 – Measurement basis of assets backing life insurance and life investment contracts
Type of asset Measurement basis
Financial assets Fair value in accordance with AASB 139 (Fair value through profit or loss – see the Developments section earlier in this chapter)
Investment property Fair value using the fair value model under AASB 140 Investment Property (Fair value gains and losses through profit or loss)
Property, plant and equipment (including owner-occupied property)
Revaluation model under AASB 116 Property, Plant and Equipment, being fair value less any subsequent accumulated depreciation and subsequent accumulated impairment losses (revaluation movements through equity)
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Consolidation
AASB 1038 requires the full consolidation of statutory funds and all controlled entities. It recognises that the interests of policyholders and shareholders are intertwined and form the basis of a single entity. Where the parent entity controls the life insurance subsidiary, the parent in turn controls the assets and liabilities of the statutory funds and the policyholders’ interests.
Benefit funds of friendly societies are also consolidated in the same form as the consolidation of a life insurance company statutory fund.
Acquired life insurance contracts
When purchasing a life insurance company or a portfolio of life insurance contracts, a life insurer must value the insurance assets and insurance liabilities assumed at fair value. They are also then permitted, but not required, to split the fair value into two components:
A liability measured in accordance with the insurer’s accounting policies for life insurance contracts; and
An intangible asset, representing the difference between the fair value of the insurance contracts acquired and the liability noted above.
The intangible asset is exempt from the recognition and measurement requirements of both AASB 138 Intangible Assets and AASB 136 Impairment of Assets. It is not exempt from the disclosure requirements. The subsequent measurement has to be consistent with the measurement of the related liability, i.e. it will be amortised over the life of the liabilities, consistent with the profit recognition on those contracts.
Disclosure requirements
AASB 1038 requires specific life insurance contract disclosures. The key requirements are summarised below, but this list is not exhaustive. For full details of the disclosure requirements of AASB 1038, see the PricewaterhouseCoopers publication “VALUE AIFRS Life Insurance Australia – Annual financial reporting 2005” (November 2005 update).
Explanation of recognised amounts – life insurance contracts
A life insurance company is required to disclose “information that identifies and explains the amounts in its financial report arising from life insurance contracts”, including:
Accounting policies for life insurance contracts and related assets, liabilities income and expenses;
Assets, liabilities income, expense and cash flows arising from life insurance contracts (AASB 1038 paragraph 14.1.6 list the components of life insurance liabilities which are expected to be disclosed);
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The process used to determine the assumptions that have the greatest effect on life insurance balances, including, where practicable, quantified disclosure of those assumptions (AASB 1038 paragraph 14.1.5 list the assumptions which are expected to have the greatest effect);
The effect of changes in assumptions used to measure life insurance assets and life insurance liabilities, showing separately the effect of each change that has a material effect on the financial report; and
Reconciliations of changes in life insurance liabilities and reinsurance assets. The following split of expenses must be disclosed by life insurers:
Outwards reinsurance expense;
Operating expenses:
– Claims expense;
– Policy acquisition expenses, separated into material components including commission;
– Policy maintenance expenses; and
– Investment management expenses; and
The basis for the apportionment of operating expenses between:
– Life insurance contract acquisition;
– Life insurance contract maintenance;
– Investment management expenses;
– Life investment contract acquisition;
– Life investment contract maintenance; and
– Other expenses.
Amount, timing and uncertainty of cash flows – life insurance contracts
To meet the requirements, the following disclosures should be made in respect of life insurance contracts:
Objectives in managing risk and policies for mitigating risk;
Contract terms and conditions which have a material effect on the amount, timing and uncertainty of cash flows;
Information about insurance risk (before and after risk mitigation by reinsurance), including:
– The sensitivity of profit and equity to changes in variables (for material effects);
– Insurance risk concentration;
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– Interest rate risk and credit risk disclosures, detailing:
- Exposure to interest rate risk by class of asset and liability, including details of contractual repricing or maturity dates and effective interest rates, where applicable; and
- Exposure to credit risk for each class of financial asset or other credit exposure, including the maximum credit risk exposure and significant concentrations of insurance risk.
Assets backing life insurance or life investment contract liabilities
Life insurers should disclose the process they have adopted to determine which assets back their life insurance or life investment contract liabilities.
HEALTH INSURANCE
Australian RHBOs are required to prepare financial statements that comply with AIFRS. AASB 1023 applies to all contracts of insurance issued by RHBOs.
The key principles and disclosure requirements of the revised AASB 1023 are set out in this section under General Insurance. This section sets out specific matters relevant to the application of the revised AASB 1023 by RHBOs.
In order to ensure a consistent approach to interpreting the revised AASB 1023, the Australian Health Insurance Association (AHIA) has developed guidance notes to assist RHBOs in applying the revised AASB 1023.
The key issues addressed by the guidance notes include the following:
Assessment of insurance risk
The revised AASB 1023 applies to “general insurance contracts” defined as a contract under which one party (the insurer) accepts significant insurance risk from another party. RHBOs will need to assess the extent of risk transfer in new products launched.
RHBOs may issue contracts that do not transfer “significant insurance risk” within the meaning of the revised AASB 1023. For example, the benefits under certain products may be restricted to the extent that claims payments are not variable enough for the RHBO to have demonstrated the transfer of significant risk.
If no significant insurance risk is transferred, AASB 1023 will not apply and RHBOs would instead apply AASB 139 to the contract to the extent that the contract gives rise to financial assets or financial liabilities. To the extent that the contract is a service contract it should be treated under AASB 118.
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Premium revenue
Under the revised AASB 1023, premium revenue is recognised from the date on which the insurer accepts insurance risk (“attachment date”) over the period of the contract in accordance with the pattern of the incidence of risk expected.
Unlike most other forms of insurance contract, a health insurance contract does not typically stipulate a fixed period of cover as contracts typically require payment in advance and include an option for the policyholder to renew. In practice, RHBOs recognise premiums from the date cash is received over the period covered by the payment. It should be noted that under the National Health Act 1953, RHBOs are legally obliged to continue cover for 60 days if a policyholder’s premiums are in arrears. RHBOs will therefore need to consider past experience to determine whether it is appropriate to accrue for premiums in arrears.
It should be noted that with regard to the LAT required by the revised AASB 1023 the unearned element of premiums in arrears and the expected claims relating to that business should be considered.
Measurement of outstanding claims
The requirements of the revised AASB 1023 are set out in the General Insurance section. Matters of particular importance to RHBOs are set out below.
Central estimates
A central estimate of claims incurred is the mean of all possible values of outstanding claims liabilities as at the reporting date. The central estimate, therefore, has a 50 per cent probability of adequacy (i.e. there is a 50 per cent chance that the central estimate will be adequate to meet all future claims payments).
Risk margin
The revised AASB 1023 requires that the outstanding claims liability includes a risk margin to reflect the inherent uncertainty in the central estimate of the present value of the expected future payments. It does not specifically prescribe a fixed risk margin or probability of adequacy. RHBOs need to determine the level of risk margin that may have been implicitly held at the date of transition to AIFRS.
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Regulatory valuations
The solvency requirements for RHBOs are set by PHIAC and are set out in Health Benefits Organisations – Solvency Standard 2003. Under this standard the starting point for valuing liabilities is the value shown in the financial statements. This valuation is then adjusted for “solvency risks” being the risks relating to assumptions used valuing liabilities.
Discounting
The revised AASB 1023 requires the liability for outstanding claims to be discounted to reflect the time value of money. As health insurance claims are generally settled within one year, RHBOs may be able to demonstrate that no discounting of claims is required as the difference between the future and present value of claims payments is not material.
Deferred acquisition costs
When acquisition costs meet certain criteria they must be deferred, recognised as assets and amortised systematically.
This may represent a significant change for RHBOs which may previously have expensed these costs as incurred. RHBOs will need to establish procedures to identify relevant costs to be deferred. Due to the maturity of the Australian health insurance market and the tendency for customers not to switch between funds, the costs to be deferred may not be material. RHBOs will, however, need to put procedures in place to gather sufficient data to make this assessment.
Unearned premium and the liability adequacy test
Unearned premium
Typically RHBOs have referred to the unearned premium liability as “contributions in advance”. These are determined in accordance with AASB 1023.
Liability adequacy test
The revised AASB 1023 requires a LAT to be performed by the RHBO at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio. The AHIA guidance note suggests that RHBOs should dissect portfolios into at least two classes of business: hospital and ancillary. A RHBO may determine further disaggregation of portfolios depending on its particular portfolio of products.
For consolidated financial statements, where the consolidated entity includes two or more RHBOs, the LAT should be performed at the consolidated level.
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AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
There may be a number of accounting considerations for authorised representatives and insurance brokers from the general application of AIFRS, depending upon the instruments and contractual arrangements brokers have in place.
Commission revenue is recognised on the effective commencement or renewal dates of the policies only when additional services are not required to be rendered by the authorised representative or insurance broker. Where it is probable that additional services will be required to be rendered the commission is deferred and recognised over the period services are provided.
Under AASB 132 Financial Instruments: Presentation and AASB 139, premium receivables, premium payables and premium cash collected continue to be recognised on-balance sheet, except where the terms of the contractual arrangement indicate otherwise.
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4.4 Annual accountsIn general, a public company must file its annual shareholder accounts with ASIC within four months of year-end. Small proprietary companies are generally not required to lodge the shareholder accounts with ASIC. The shareholders’ accounts prepared under the Corporations Act must be independently audited by an Australian registered auditor.
GENERAL INSURANCE
The Financial Sector (Collection of Data) Act 2001 made APRA the single government collection agency for financial sector data. Therefore, all of APRA’s industry supervision acts, including the Insurance Act, were amended to remove their data collection provisions. The yearly statutory accounts, which must be audited, are required to be prepared on a different basis than the financial statements which must comply with the Corporations Act and Australian accounting standards. The key differences are outlined in the following table:
Table 4.5 – Key differences in treatment between financial and prudential reporting
Item AASB 1023 treatment APRA treatment Adjustment required
Premiums (including unclosed business)
Earned over the life of the policy based on the pattern of risk and LAT, providing for premium deficiency
Recognised as income at policy attachment date
Write back movement in unearned premiums
Acquisition costs (including fire brigade charges)
Costs are deferred and amortised over the period of benefit (i.e. premium earning)
Recognised on an as-incurred basis
Write back movement in DAC
Reinsurance expense Recognised on a basis consistent with the pattern of reinsurance
Recognised as an expense at policy attachment date
Write back movement in deferred reinsurance
Claims Includes estimating expected claims (IBNR) on earned premiums
Includes estimating expected claims on written premiums
Increase liability for outstanding claims by expected losses on unexpired period of policies (premium liabilities). Adjust for differences in assumptions on discount rate and level of risk margins
Recoveries (reinsurance and other)
Includes estimating expected recoveries on outstanding claims
Includes estimating expected recoveries on outstanding claims and premium liabilities
Increase asset for expected recoveries consistent with change in liability for outstanding claims and premium liabilities
Tax Liability method Liability method The adjustments above must be tax effected
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APRA prudential standards stipulate that for prudential reporting purposes, an insurer must:
discount insurance liabilities using Commonwealth Government bond rates; and
include a risk margin so as to achieve 75 per cent probable adequacy of insurance liabilities and not less than half the coefficient of variation.
For some insurers, this may result in differing treatments for prudential and financial reporting purposes. In this case, the standards indicate that disclosure of the differing treatments should be included in the published financial statements.
The two accounting frameworks are reconciled within the audited APRA yearly statutory accounts forms. The yearly statutory accounts forms and their instructions can be found on the APRA website (www.apra.gov.au).
An insurer that holds an Australian Financial Services Licence (AFSL) under the Financial Services Reform Act 2001 (the FSR Act) also needs to comply with the reporting requirements for licensees (see “Authorised representatives and insurance brokers” below).
LIFE INSURANCE
The Life Act currently requires life insurers to file financial statements with APRA each year that comply with PR 35. PR 35 sets out additional disclosure requirements giving further detail in relation to statutory funds and the shareholders’ funds and policyholders’ profits.
When life insurers obtain an AFSL under the FSR Act, they need to comply with the reporting requirements for licensees (see “authorised representatives and insurance brokers” below).
Friendly societies
Friendly societies are required to produce general purpose financial statements in accordance with the revised AASB 1038.
AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
As AFSL holders, authorised representatives and insurance brokers are required to lodge forms FS 70 (profit and loss statement and balance sheet) and FS 71 (audit report). These forms must be lodged within:
three months of financial year-end for bodies corporate which are disclosing entities;
four months of financial year-end for bodies corporate which are not disclosing entities; or
two months of financial year-end if the licensee is not a body corporate.
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It is possible to apply to ASIC under Section 989 D(3) for an extension of time for lodging the forms.
For AFSL holders which are not regulated by APRA, the auditor will need to review measures for ensuring compliance with all of the financial requirements set out in the licence conditions, which are more extensive than under the old regime and include:
Ability to pay all debts as and when they become due and payable;
That total assets exceed total liabilities at all times;
Sufficient cash resources to meet three months’ expenses plus adequate cover for contingencies, based on rolling three-month cash flow projections that meet ASIC’s requirements;
Requirement to hold $50,000 of surplus liquid funds for licensees that hold more than $100,000 of client funds; and
Tiered requirement to hold $50,000 to $10 million of adjusted surplus liquid funds for licensees that have more than $100,000 of liabilities from transacting with clients as a principal.
Furthermore, the management of all licensees will have to demonstrate to the auditor their procedures for ensuring compliance with Part 7.8 of the Corporations Act. Not only does this include requirements similar to the old regime concerning trust accounts, financial records and financial statements, but it also includes procedures relating to:
Preventing unconscionable conduct;
Complying with “anti-hawking” or cold-calling restrictions in relation to financial products; and
Adequate staff training and identification of breaches.
In addition, Section 990(K) contains “whistle-blowing” provisions that obligate auditors to report to ASIC within seven days if they become aware of a situation that may adversely affect the ability of the licensee to meet its obligations and may result in a breach of either:
the conditions of the licence; or
the requirements pertaining to trust accounts, financial records or financial statements.
HEALTH INSURANCE
Audited annual Corporations Act financial statements must be lodged in line with the requirements of the Corporations Act, i.e. within three months for a disclosing entity and four months for a non-disclosing entity.
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4.5 Other returns
GENERAL INSURANCE
Under stage 2, in addition to the compliance declarations and statements described above, the general insurer must also provide APRA with:
A set of annual statutory accounts;
A financial information declaration (FID);
The approved auditor’s opinion on the annual statutory accounts;
The approved actuary’s Insurance Liability Valuation Report (ILVR);
The approved actuary’s financial condition report (FCR); and
Quarterly statistical and financial returns.
The general insurer must also arrange for an independent peer review of the approved actuary’s ILVR.
Financial information declaration
One of the new requirements of stage 2 is that a general insurer must provide to APRA a FID stating that:
The financial information lodged with APRA has been prepared in accordance with the Insurance Act, regulations, prudential standards, the Collection of Data Act 2001, accounting standards and other mandatory professional reporting requirements in Australia, to the extent that the accounting standards and professional reporting requirements do not contain any requirements contrary to the aforementioned legislative and prudential requirements;
The information provided to the approved auditor and approved actuary for the purpose of enabling them to undertake their roles and responsibilities is accurate and complete, consistent with the accounting records of the insurer, and a true representation of the transactions for the year and the financial position of the insurer; and
The financial information lodged with APRA is accurate and complete, consistent with the accounting records, and represents a true and fair view of the transactions for the year and the financial position.
This declaration is to be signed by the chief executive officer (CEO) and the chief financial officer (CFO), or local equivalents for a branch operation, and is due within four months of the financial year-end.
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Any qualifications must include a description of the cause and circumstances of the qualification, and the steps taken, or proposed to be taken, to remedy the problem.
Approved auditor’s opinion
The approved auditor must prepare a certificate, addressed to the board of the general insurer, in respect of the insurer’s yearly statutory accounts.
The certificate must specify whether, in the approved auditor’s opinion, the yearly statutory accounts of the general insurer present a true and fair view of the results of the operations for the year and financial position at year-end, in accordance with:
The provisions of the Insurance Act and prudential standards, the Collection of Data Act and reporting standards; and
To the extent that they do not contain any requirements that conflict with the aforementioned, Australian accounting standards and other mandatory professional reporting requirements in Australia.
In preparing the certificate, the approved auditor must have regard to relevant professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB), to the extent that they are not inconsistent with the requirements of this prudential standard.
Approved actuary’s insurance liability valuation report
GPS 310 specifies the contents and the requirements of the ILVR. These contents and requirements are as follows:
This report must be addressed to the board of the insurer and provide the approved actuary’s advice in respect of the value of the insurer’s insurance liabilities, determined in accordance with GPS 310;
This report must, in respect of each class of business underwritten by the insurer (or in abbreviated details for classes that are immaterial), provide:
– The value of the insurance liabilities;
– The assumptions used in the valuation process and the justifications of these assumptions;
– The availability and appropriateness of the data;
– Significant aspects of recent experience;
– The methodologies used to model the central estimates of outstanding claims liabilities and premium liabilities;
– An indication of the uncertainty in the central estimate, including statistics such as the standard deviation;
– The results of the sensitivity analyses undertaken;
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– A description of the probability distributions and parameters, or approaches adopted to estimate uncertainty;
– Risk margins that relate to the inherent uncertainty in the central estimate values for outstanding claims liabilities and premium liabilities.
The report must provide sufficient information in relation to the assumptions and methods used for the valuation liabilities so that another actuary reading the report can obtain a sound understanding of the valuation process and results, limitations and key risks in the insurance portfolio; and
This report must be prepared by the approved actuary and be subject to an independent peer review.
When an insurer does not adopt the value of the insurance liabilities recommended by the approved actuary, the insurer must notify APRA in writing, and should include within its published annual financial statements:
The reasons for not accepting the approved actuary’s advice, or for not determining the insurance liabilities in a manner consistent with GPS 310; and
Details of the alternative assumptions and methodologies used for determining the value of the insurance liabilities.
Approved actuary’s financial condition report
Under GPS 310, the approved actuary must prepare an annual FCR. This report must be filed with APRA at the same time or before lodgement of the yearly statutory accounts.
The FCR must be addressed to be the Board of the insurer and provide the approved actuary’s objective assessment of the overall financial condition of the insurer. APRA requires that in preparing an FCR, an approved actuary must have regard to relevant professional standards issued by the IAA, to the extent that they are not inconsistent with the requirements of GPS 310. The relevant professional standard for this purpose is General Insurance Standard 305 Financial Condition Reports for General Insurance released in March 2006. This professional standard took effect on June 2006.
In accordance with GPS 310 and professional standard 305, the FCR must include or show consideration for the following:
Statements by the approved actuary, setting out who commissioned the actuarial reporting, the scope and purpose of the FCR, the specified terms of reference and any limitations or restrictions placed upon the actuary;
Information requirements, including identification of the information upon which the approved actuary placed material reliance in preparing the FCR, the limitations of the FCR as a result of material data discrepancies, and any other data reliances and limitations;
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Business overview;
Assessment of the insurer’s recent experience and profitability, including at least the experience during the year ending on the valuation date;
Summary of the key results of the ILVR (prepared in accordance with GPS 310);
Assessment of the adequacy of past estimates for insurance liabilities (may include references to the current or past ILVRs);
Assessment of the asset and liability management, including the insurer’s investment strategy;
Assessment of pricing, including adequacy of premiums;
Assessment of the suitability and adequacy of reinsurance arrangements;
Assessment of the suitability and adequacy of the risk management framework; and
Assessment of capital management and capital adequacy.
The approved actuary is required to consider the future implications and outlooks of the above matters. If the implications are adverse, the approved actuary must propose recommendations to address the issues.
As a general rule, an FCR must be completed in respect of each insurer. An insurance group may submit to APRA an FCR in respect of the insurance group where the approved actuary completing the FCR is the approved actuary for each insurer included in the FCR or it is practical to produce a single over-arching FCR. If the single FCR does not adequately address each of the above issues for any single insurer, APRA may require one or more insurers in the group to prepare and submit to APRA a new FCR.
Foreign insurers must prepare an FCR in respect of their Australian branch operation.
Independent peer review
Under GPS 310, the general insurer must arrange for an independent peer review of the approved actuary’s ILVR. This peer review must provide an assessment of the reasonableness of the approved actuary’s investigations and reports including the results contained within.
Copies of the report must be provided to the approved actuary, the approved auditor, the board and the management of the insurer before the yearly lodgement of statutory accounts. The review report is not required to be provided to APRA, but must be made available to APRA upon request.
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In March 2006, the IAA released Professional Standard 100 External Peer Review for General Insurance and Life Insurance, which details the responsibilities of the reviewing actuary and the reviewing requirements.
Items to be reviewed by the external peer reviewer include:
Scope – Consideration of the appropriateness of the scope of the primary actuary’s specified valuation and of the actuarial advice provided in relation to it;
Data – Consideration of the sources of data, whether appropriate and sufficient data inputs have been used, and that the quality of these have been checked by the primary actuary or the personnel employed to support the primary actuary;
Valuation methods – Consideration as to whether the methods chosen are suitable in the circumstances and within the range of reasonable current practice, and whether their application has been appropriate;
Assumptions – Consideration as to whether assumptions are consistent with experience investigations, industry trends and reasonable judgement;
Controls – Consideration as to whether appropriate quality assurance reviews and controls are in place;
Analysis of specified valuation results – Consideration as to whether results have been developed following a reasonable sequence of steps; that there is consistency within the results; and that changes in the results from one year to the next have been adequately explained;
Specified valuation results – Consideration as to whether results have been clearly stated, that they are supported by the experience and any reasonableness tests undertaken have been identified in the primary actuary’s report. Consideration must also be given as to whether the reliances and limitations of the primary actuary have been clearly stated; and
Standards – The reviewing actuary must consider whether the work complies with applicable legislation, including regulations and subordinate legislation, relevant professional standards and takes regard of guidance notes with appropriate disclosures.
National Claims and Policies Database
The National Claims and Policies Database requires insurers to submit claims and policies at three different levels of aggregation and analysis. Classes covered by this database include public and product liability and professional indemnity. This database, managed by APRA, supplements databases on CTP and workers compensation in several states and aims to provide transparency in the industry. The data may also reduce the volatility through the insurance cycle, as insurers will have access to more information to assess the risks more precisely.
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LIFE INSURANCE
In addition to the requirement to file annual financial statements with APRA that comply with PR 35 within three months of the financial year-end, life insurance companies (other than friendly societies) are required to file, inter alia:
An annual FCR prepared by the appointed actuary;
An audit report on compliance with derivative risk management statement;
Prudential Rule No. 26 (PR 26) return and audit report;
Quarterly statistical returns; and
Reinsurance reports under Prudential Rule No. 23 (PR 23) within three months of the financial year-end.
Derivatives and risk management statements
Life Insurance Circular C.I.1 Derivatives – Use, Management and Control (issued in November 1995) contains the requirements that life insurance companies must meet in respect of their risk management statements. Paragraph four of the circular contains the requirement that directors sign off on the risk management statements in their declaration in the financial statements. This requirement was subsequently modified by a letter to life insurance company CEOs and auditors issued by the then Insurance and Superannuation Commission (ISC) on 25 March 1997, which removed the requirement for the directors to include a statement that the contents of the risk management statements are understood. Life insurance companies must lodge the audit report on the risk management statements at the same time as the annual financial statements.
Prudential Rule No. 26
Quarterly statistical returns on investments and exposures are required to be submitted to APRA within six weeks of quarter end. The statistics in Schedule 1, Forms A–H, and the new form M Credit Risk, which coincide with the financial year-end, must be audited by the life insurance company auditor. The returns must be consistent with the company’s annual financial statements. The quarterly PR 26 that coincides with the financial year-end must be submitted with the audit report within three months of the balance date.
Friendly societies
Friendly societies must lodge:
Annual financial statements which comply with PR 47 within three months of year-end (subject to amendment following transition to AIFRS);
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An annual FCR;
An appointed actuary’s statement of pecuniary interests;
An audit report on compliance with risk management statements; and
A reinsurance report (if applicable).
HEALTH INSURANCE
All health insurance funds must provide a number of other returns under various legislative requirements. These include:
PHIAC 1 Returns – Quarterly state and territory-based returns must be prepared if the health benefits fund has more than 500 Single Equivalent Units in each state or territory. These must be prepared in accordance with the guidelines established in PHIAC circulars. Each quarterly return is audited by the fund’s external auditor at the end of the financial year;
PHIAC 2 Returns – This is the main reporting requirement under the solvency and capital adequacy standards. Quarterly returns are lodged with PHIAC and the annual return is audited by the fund’s external auditor. The annual return includes an unaudited certification by directors regarding risk management;
PHIAC 3 Returns – These quarterly returns contain prostheses reports and are not required to be audited;
PHIAC 4 Returns – Specialty gap cover data is required to be provided quarterly to PHIAC. The totals reported on this quarterly PHIAC 4 medical gap report should be consistent with data reported in the quarterly PHIAC 1 return. These are not required to be audited;
30 per cent Rebate Returns – Health benefits funds are required to lodge a monthly application for the rebate with Medicare Australia in order to receive the rebate.The funds are required to prepare an annual schedule of receipts from the Health Insurance Commission (HIC) under Subsection 16-5(7) of the Private Health Insurance Incentives Act 1998. This schedule of receipts and the associated systems used to derive the monthly application must be audited by the fund’s external auditor;
Second Tier Benefits Returns – The Department of Health and Ageing issued circular HBF 721/PH 455 in July 2001, which outlined the amended requirements under Paragraph (bj) of Schedule 1 to the National Health Act. Under these requirements, if a health facility is accredited with a Commonwealth provider number and it does not have Hospital Purchaser Provider Agreements (HPPA) or a similar agreement with a particular health fund, it may approach the fund for its second tier benefits rates. The health benefits funds are required to calculate 85 per cent of the average HPPA rates, effective at 1 August, for procedures that are included in the majority of their HPPAs.
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The audit report must be lodged with both the Department of Health and Ageing and PHIAC by 30 September each year; and
Rural and Regional Default Benefit Arrangements – The Department of Health and Ageing issued circular PHI 13/03 in July 2003, which outlined the amended requirements under Paragraph (bj) of Schedule 1 to the National Health Act. These requirements apply to private hospitals with less than 50 beds and day hospital facilities located in rural and regional areas. The health benefit fund is required to adjust the second tier benefits calculation if the calculated rate for a procedure is less than the Ministerial Determination made under Paragraph (bj), Schedule 1 to the National Health Act, to the rate within the determination. The audit report must be lodged with both the Department of Health and Ageing and PHIAC by 30 September each year.
4.6 Key dates
GENERAL INSURANCE
Financial Sector (Collection of Data) Act
Lodgement of returns
Quarterly forms (GRF 110.0 – 310.3*)
Within 20 business days of the end of each quarter.*These forms may be subject to review as part of the work performed by the approved auditor under AGS 1064 Audit Implications of Prudential Reporting Requirements for General Insurers.
Annual forms and report (GRF 110.0 – 450.0), [only GRF 110.0 – 320.0 are audited] including directors’ certification in respect of the Risk Management Strategy (RMS) or Reinsurance Management Strategy (REMS), FID, approved actuary’s ILVR and FCR, approved auditor’s certificate on the yearly statutory accounts and APRA prudential compliance review report
Within four months of the year-end.
Business plan
Annually (when approved by the board) and when material changes are made.
Changes in reinsurance and risk management strategies
Within 10 days of board approval. The revised REMS must be approved by APRA.
Changes to details in original application for licence, including appointment of senior staff, approved actuary and approved auditor
Must be approved by APRA prior to the change taking effect.
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National Claims and Policies Database data (GRF 800.1 – 800.3 and LOLRF 800.1 – 800.3)
Within two months from the end of the half year (30 June and 31 December).
Workers compensation legislation
Annual returns
New South Wales (Form 4) [audited]
Within six weeks of balance date.
New South Wales Dust Diseases Return (and adjustment sheet)
Within six weeks of balance date.
Northern Territory (Forms A, B) [audited]
Registered with and approved by Work Health Authority. Renew approval each year, no later than 42 days before expiry of last approval.
Tasmania (Form C) [unaudited], (Form D) [audited]
Due by 31 July each year.
Quarterly returns
New South Wales (Forms 1.1 – 1.3, 2.2 – 2.3, 5.1 – 5.2) [audited annually]
Within four weeks of 30 September, 31 December, 31 March and 30 June.
Monthly returns
New South Wales (Forms 2.1, 3, 6.1 – 6.3, 7.1 – 7.4) [audited annually]
Within four weeks of the end of each month.
Tasmania (Forms A, B)
Within 28 days of the end of each month.
Western Australia (Forms 16, 17)
Within 14 days of the end of each month.
Other contributions or levies payable
New South Wales WorkCover Authority
Within 15 days of each month end.
New South Wales Dust Diseases levy
Two instalments, 31 March, 30 November.
Western Australia Workers Compensation and Rehabilitation General Fund levy
Due by 1 October each year or in quarterly installments in October, January, April and June each year.
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Minimum contribution self-insurers: $25,000; insurance companies: $100,000, refer to individual notification.
Compulsory third-party legislation
Motor Accidents Act 1988 – New South Wales lodgement of returns
Copies of all returns filed with APRA, including audited financial statements
Within two business days of filing.
Copies of all correspondence received from or dispatched to APRA
Within two business days of receipt or despatch.
Existence of and details regarding any securities or encumbrance over assets
Immediately following notification.
CTP insurers’ returns – New South Wales
Nominal Defendant Scheme Claims
– Report of recoveries by insurers
Half-yearly (31 January and 31 July).
– Notification of finalisation of Nominal Defendant Scheme Claims
When information is available.
Detailed CTP premium income returns for deregulated premiums
Quarterly (21 days after quarter end).
Statistics for Motor Accidents Authority (MAA) Claims Register
– Claims data
Monthly tape transfers (seven days after month end).
– Payments data, including estimates
Quarterly tape transfers (15 days after quarter end).
CTP premium filing and such additional information (including actuarial reports) as the MAA may reasonably require
Whenever the company proposes to alter premiums and, in any event, at least once a year.
APRA returns and correspondence
Within two days of receipt or despatch, as applicable.
Levies and charges – New South Wales
– Bulk billing lump sum for hospital and ambulance payments
Quarterly.
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Levy on deregulated premium collections
Monthly (14 days after month end) and audited annually.
Financial Services Reform Act
Annual returns
Financial statements and FSR Act compliance audited opinion
Within three months of balance date (or two months if the licensee is not a body corporate).
LIFE INSURANCE
Life Insurance Act
Annual returns
Annual report PR 35 [audited]
Within three months of balance date
Annual statistics (PR 26 – Schedule 3, Forms A, B, C and PR 26 – Schedule 3, Form D, Parts 1, 2)
Within three months of balance date.
FCR of the actuary (Section 113 of the Life Act)
Within three months of balance date. It should be noted that under Section 115 of the Life Act, a life insurer may elect to prepare a FCR at any other balance date. A copy of such a report must be provided to APRA within three months of the relevant balance date.
Reinsurance report (PR 23)
Within three months of balance date.
Appointed actuary’s statement of pecuniary interests (Regulation 6.01)
Within three months of balance date.
Audit report on derivatives risk management statements (Circular C.I.1, updated by CEO letter dated 25 March 1997)
Within three months of balance date.
Half-yearly returns
Financial statistics (PR 26 – Schedule 2, Forms A, B, C)
Within six weeks from 31 December or 30 June.
Market statistics (PR 26 – Schedule 1, Form I, Parts 1, 2, 3)
Within six weeks from half-year balance date.
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Restricted investments (Prudential Rule No. 12)
Within six weeks from half-year balance date.
Quarterly returns
Asset exposures, asset-liability profile (PR 26 – Schedule 1, Forms A–H, J–M) [Forms A-H & M are audited for balance date quarter]
Within six weeks from the end of each quarter, and within three months of balance date.
Other returns
Changes to particulars specified in the application for registration or in the particulars of the information or documents required to accompany the application for registration
Within such time as prescribed. The prescribed time under Regulation 3.02 is 14 days from the date the change took place.
Appointment or termination of actuary
Within 14 days of appointment or termination.
Financial Services Reform Act
Annual returns
Financial statements and FSR Act compliance audited opinion
Within three months of balance date for a body corporate that is a disclosing entity and/or a responsible entity of a registered scheme (RE), within four months for a body corporate that is not a disclosing entity and/or RE and within two months if the licensee is not a body corporate.
HEALTH INSURANCE
Private Health Insurance Administration Council
Lodgement of returns
Unaudited quarterly PHIAC 1* and 2 returns
Within four weeks of the end of each quarter.
Annual audited quarterly PHIAC 1* returns
All four quarters returns by 30 September each year.
Annual audited PHIAC 2 returns and certificate of risk management systems
By 30 September each year.
Quarterly unaudited PHIAC 3 prostheses reports
From March 2006 quarter, within 28 days of the quarter end.
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Quarterly unaudited PHIAC 4 medical gap reports
From December 2005 quarter, within 28 days of the quarter end.
Annual audited financial statements of health fund
By 30 September each year.
Annual audited financial statements of the legal entity of which the health fund is part, if these are available to members
By 30 September each year.
* A PHIAC 1 return is to be completed for each state in which a fund has 500 single equivalent members.
Health Benefits Trust Fund
Letters advising of the distributions to/from the fund are sent out quarterly following the processing of PHIAC 1 returns
Approximately eight weeks from each quarter end.
Annual levy
Annual levy is based on fund membership numbers
Payment is due quarterly, within two weeks of the request for payment.
Medicare Australia
Lodgement of returns
Annual statement of 30% rebate receipts [audited]
Within four weeks from the end of the year.
Federal Department of Health and AgeingLodgement of returns
Audited Second-Tier Benefits Rates
By 30 September each year (where applicable).
AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
Financial Services Reform Act
Annual returns
Financial statements and FSR Act compliance audited opinion
Within three months of balance date for a body corporate that is a disclosing entity and/or a responsible entity of a registered scheme (RE), within four months for a body corporate that is not a disclosing entity and/or RE and within two months if the licensee is not a body corporate.
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Developments 136
Personal taxation 147
Levies and premium taxation 148
Stamp duty 149
Goods and services tax 151
Key dates 155
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5.1 DevelopmentsTax reform in Australia continues to gather pace during this year with the imminent release of the Taxation of Financial Arrangements legislation; and sweeping changes to the taxation of superannuation contributions and benefits.
The key income tax developments are summarised below.
In January 2007, the second exposure draft was released containing measures dealing with stages three and four of the Taxation of Financial Arrangements.
The new simplified superannuation rules were enacted on 15 March 2007. The rules make super a more attractive investment whilst attempting to simplify how super is administered.
The 2007 Federal Budget contained a number of proposed measures dealing with corporate taxation including the abolition of the $100m cap on the ability to access the same business test for claiming tax losses, refinements to the tax consolidation rules (including changes relevant to general insurers – refer below) and an extension of the AIFRS transitional period for thin capitalisation purposes.
New legislation was introduced which broadly exempts non-residents from capital gains tax with the exception of real property and business assets of a permanent establishment.
New legislation was introduced which expanded the types of “blackhole” expenditure which could be amortised for tax purposes.
New legislation was introduced which replaced the old share tainting rules.
The High Court of Australia decision in the McNeil’s case ruled that certain buy back rights received by St George shareholders were considered ordinary income. From a broader perspective, the Australian Taxation Office (ATO) is currently clarifying how the case impacts the tax treatment of rights issues.
During 2006, the ATO has issued two key Goods and Services Tax (GST) rulings that are likely to have an impact on insurers:
GST Ruling 2006/9 – Goods and Services Tax Ruling: Supplies. This final ruling (previously released in draft form as GSTR 2005/D8)) deals with the concept of a “supply” for GST law purposes, and examines in detail the characteristics of a supply. The ruling also addresses the typical flow of GST transactions in the context of arrangements between multiple parties (eg. tripartite arrangements).
GST Ruling 2006/10 – Goods and Services Tax Ruling: insurance settlements and entitlement to input tax credits. This final ruling (previously released in draft as GSTR 2005/D9) addresses many of the same concepts covered in GSTR 2006/9, however, in this ruling those concepts are made more specific to the business of insurance. This ruling provides some clarity for insurers around the circumstances where an input tax credit is available for an acquisition made in settlement of an insurance claim.
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5Taxation
The commentary below is a summary of the significant income tax reform measures and does not attempt to provide an exhaustive coverage of the relevant law.
TAX CONSOLIDATION
The tax consolidation rules apply to 100 per cent-owned corporate groups to treat them as effectively a single entity for income tax purposes. Due to the complexity of the rules, they are regularly being updated, refined and clarified. However, there continues to be a number of key issues which await resolution especially around the calculation of cost setting amounts.
Areas which have received further guidance during the year include:
share capital tainting within a consolidated group (legislation)
deductibility of funding costs in relation to internal restructuring of a consolidated group and cost setting impact of certain restructures (Treasury announcement and various Tax Determinations)
errors in tax cost setting amounts (Draft Taxation Ruling)
the Government in the 2007 Federal Budget announced a number of refinements to the tax consolidation rules some of which are retrospective but many prospective. Of particular interest to general insurers is that for tax cost setting purposes, the value of liabilities (ie unearned premium reserve and outstanding claims reserve) is reduced by the accounting deferred acquisition costs, deferred reinsurance premiums, and recoveries receivables.
TAXATION OF FINANCIAL ARRANGEMENTS
The Australian Government announced its intention to overhaul the law relating to the taxation of financial arrangements (TOFA) more than a decade ago. The changes involved a four-stage process.
The first stage, which came into effect on 1 July 2001, introduced new rules to distinguish debt from equity for some, but not all, taxpayers.
The second stage of TOFA, which was introduced with effect from 1 July 2003, the revamped treatment of foreign exchange gains and losses.
Federal Treasury has released two exposure drafts of the third and fourth stages of TOFA, the latest being on 3 January 2007. The exposure draft contains rules dealing with the tax-timing treatment of financial arrangements. The key measures are that:
gains and losses realised from financial arrangements are generally treated as assessable and deductible (i.e. on revenue account); and
the timing of realisation is dependent on the application of a number of tax-timing methods (some of which are elective). The elective methods generally align the tax treatment of financial arrangements with the accounting treatment; and
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under the hedging election and provided certain requirements are met, tax should no longer distort the effectiveness of hedges as the rules allow the timing of gains and losses to be hedged without character (ie revenue versus capital) mismatches.
There are a number of exemptions from the application of the TOFA rules. In particular, general insurance and life insurance policies are specifically excluded. In addition, the Government in the 2007 Federal Budget announced that finance leases will be excluded from the TOFA rules and therefore, retain its existing tax treatment.
The rules are proposed to apply from 1 July 2007 (by election) or mandatorily from 1 July 2008. For early balancing companies, the start date is the beginning of the first income year after 1 July 2007 (optional) or the first income year after 1 July 2008 (mandatory). The TOFA rules apply to financial arrangements entered into after the relevant start date unless an election is made to also bring existing financial arrangements into the regime.
GENERAL INSURANCE
In Australia, general insurance companies are assessed under Division 321 of the Income Tax Assessment Act (ITAA) 1936. Tax is payable on the profits of a general insurer at the corporate tax rate, currently 30 per cent.
Division 321 essentially codifies the guidelines on the appropriate tax treatment of premiums and claims specific to general insurers contained in Income Tax Ruling IT2663. The legislation effectively applies the treatments outlined in IT2663, for example, that outstanding claims reserves are required to be discounted (a position challenged in the 1999 Mercantile Mutual case). Division 321 applies from the 1991–1992 income year for general insurers.
The legislation also applies the treatment of reinsurers contained in Income Tax Ruling TR95/5, which applies to reinsurers from the 1995–1996 income years.
In 1996, the ATO issued the publicly binding Income Tax Ruling TR96/2, which deals with the taxation of financial insurance and financial reinsurance.
Premium income
Division 321 of the ITAA legislates the manner in which premium income is earned by an insurer for taxation purposes.
An insurance premium has a number of components. The gross premium, including components referable to fire brigade charges, stamp duty and other statutory charges must be included as assessable income. Insurers must recognise premium income from the date of attachment of risk. As a result, unclosed business will be brought to account in calculating tax liability.
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5Taxation
Subject to the following comments on unearned premium reserve, all premiums received or receivable in that year are included in assessable income.
Unearned premium reserve
Where part of the premium relates to risk in a future year, an unearned premium reserve (UPR) is established. When the UPR is greater at year-end than it was at the beginning, a deduction is allowed for the increase. Where it decreases over the year, the decrease is included in assessable income.
The legislation prescribes the way UPR is to be calculated. In particular, expenses relating to the issuing of policies, as well as reinsurance, reduce the amount of the UPR.
While the methodology is different to that expressed in IT2663 and TR95/5, the outcome is the same as that achieved under these rulings. In particular, the wording of the legislation also allows for the appropriate treatment of non-linear earnings patterns, such as those found in mortgage insurance and credit insurance.
The Commercial Union Australia Mortgage Insurance Corporation (CUAMIC) case in 1996 considered the tax implications of a change in the methodology adopted in calculating the UPR. It was held that the full reduction in UPR in the year was assessable, even though part of the reduction related to a change in methodology. The legislation reinforces this decision by bringing to account the movement of the UPR from one year to the next, which will automatically account for changes in the earning pattern of the premiums.
Apportionable issue costs (acquisition costs)
Costs incurred in obtaining and recording premiums are allowable deductions in the year of income in which they are incurred. These costs include commissions and brokerage fees, processing costs, risk assessment fees, fire brigade charges, stamp duty and other government charges and levies (excluding GST).
The benefit of an immediate deduction for apportionable issue costs incurred during a year of income is effectively restricted, as these costs are taken into account in the determination of the unearned premium reserve. This is achieved by determining the UPR based on gross premiums net of apportionable issue costs.
Prepayments
The prepayment legislation would normally apply to apportionable issue costs and reinsurance expense. However, as the methodology for calculating the unearned premium reserve includes a reduction component for these expenses, the legislation excludes these expenses from the prepayment rules.
Treaty non-proportional reinsurance, which is not taken into account in determining the UPR, remains subject to the prepayment rules.
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Outstanding claims
A deduction is allowed for any increase in the outstanding claims reserve during the year, while decreases in the outstanding claims reserve are assessable. In addition, claims paid during the year are deductible. This effectively mandates a balance sheet approach for determining the claims expense for the year, and with the exception of indirect claims settlement costs, should align with the current accounting treatment of claims.
This means that a deduction is allowed for the estimated cost of settling reported claims and claims incurred but not reported (IBNR) during the year of income. The deduction is based on the costs of claims incurred and paid during the year of income, an estimate of costs to be paid in respect of claims incurred during the year and a revision of previously estimated costs of claims incurred in prior years. These estimates must be soundly based but may take prudential margins into account.
The following factors may be taken into account in determining the quantum of the allowable deduction for outstanding claims and IBNR provisions:
Direct policy costs;
Claims investigation and assessment costs;
Direct claims settlement expenses;
Estimated increased costs of litigation and other factors, such as superimposed inflation; and
Recoverables, including reinsurances, excesses and salvage and subrogation.
These factors allow for the effects of inflation. However, only the present value (i.e. the value after discounting for future investment income) of costs associated with long-term claims is an allowable deduction. A deduction is not allowed for estimated indirect claims settlement costs (e.g. overheads) that cannot be attributed to a particular claim, until those expenses are paid.
Profits or losses on realisation of investments
The purchase and sale of investments are regarded as part of the income-producing activities of a general insurer. As a consequence, profits or losses on the sale of investments are generally considered to be of a revenue nature. Profits will be assessable as ordinary income, while losses will be allowable deductions. However, a profit or loss arising on the sale of a capital asset that is not part of the insurance business may be treated as a capital gain or loss. It is generally accepted that a building used as a head office or permanent place of business by an insurer is a capital asset.
Unrealised profits and losses on investments are not currently brought to account as assessable income or allowable deductions for tax purposes.
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5Taxation
Reinsurance
Generally, a premium paid for reinsurance will be an allowable deduction in the year in which the premium is incurred. Because such premiums (other than treaty non-proportional reinsurance premiums) reduce gross premiums in calculating the unearned premium reserve, the benefit of the deduction allowed in any year is effectively limited to the proportion of risk covered by the premium that has expired during the year.
Reinsurance recoveries are assessable income and future recoveries must be taken into account in determining outstanding claims reserves (unless the reinsurance is with a non-resident firm and a section 148(2) election has not been made).
Reinsurance with non-residents
Where a general insurer reinsures the whole or part of any risk with a non-resident, a deduction will not be allowed in the first instance in respect of those premiums.
These reinsurance premiums will not reduce gross premiums in calculating the unearned premium reserve and reinsurance recoveries will not be assessable.
However, an insurer may elect that this principle does not apply in determining its taxable income, in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, these reinsurance premiums should be included in the calculation of UPR, and recoveries under those reinsurance policies included in the calculation of the outstanding claims reserve (OCR).
Financial reinsurance
The ATO considers (in TR96/2) that financial insurance and financial reinsurance arrangements should be treated as the provision and repayment of loans. In determining whether an arrangement constitutes financial insurance or reinsurance, reference is made to two criteria:
The degree of insurance risk assumed; and
The possibility of the insurer/reinsurer incurring a significant loss under the arrangement.
An insurer needs to prove both of these to support a claim for a deduction of a reinsurance premium.
LIFE INSURANCE
The rules governing how life companies are taxed are contained in Division 320 of the ITAA.
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Classes of income
The income of a life insurance company is effectively divided into three classes: the Ordinary Class, the Complying Superannuation Class or Virtual Pooled Superannuation Trust (VPST) Class (both being taxable) and a Segregated Exempt Assests (SEA) Class. The VPST Class is established for the company’s complying superannuation policies.
Life insurance companies must establish a segregated asset pool for their immediate annuity policy liabilities, which is the SEA Class. All other classes of policies and any shareholder capital will form part of the Ordinary Class.
The classification of income and gains among the various classes of income (assessable and exempt) is not determined by reference to statutory funds and the mix of policy liabilities (in the case of mixed statutory funds). Rather, the life insurance company must segregate its assets by allocating these as supporting certain (tax) classes of policies it has issued.
Life insurance companies pay tax on income derived in the Ordinary Class at the rate of 30 per cent and are ordinarily taxed at a rate of 15 per cent on income derived from VPST assets. Any income derived from the SEA Class is exempt from tax.
A life insurance company remains a single entity for taxation purposes. However, the effect of the rules outlined above is that for taxation purposes, the company is effectively divided into three pools, with each segment representing a particular class of business.
A life insurance company can also form part of a tax consolidated group, in which case the head company will be deemed to be a life insurance company.
Assessable income
Tax is levied on the fee income and underwriting profits of a life insurer. A life insurer has always included investment income and realised gains on the disposal of assets in its assessable income. Assessable income also specifically includes life insurance premiums “paid” to the company, reinsurance amounts received, refunds of reinsurance paid under a contract of reinsurance and amounts received under a profit-sharing arrangement under a contract of reinsurance. In an Interpretative Decision, the ATO states that premium income should be recognised on an accruals basis.
Amounts representing a decrease in the value of the net risk components of risk policy liabilities and taxable contributions transferred from complying super funds or approved deposit funds (ADFs) are also included in assessable income.
Specified rollover amounts, fees and charges imposed in respect of life insurance policies but not otherwise included in assessable income and taxable contributions made to retirement savings accounts provided by that company also form part of the life company’s assessable income.
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Furthermore, most transfers of assets from one class to another will have a tax consequence. It is therefore necessary to carefully review and record each transfer to ensure its appropriate tax treatment.
Disposal of investments
Whether a profit or gain realised on the disposal or transfer of an investment is liable to tax (and the rate of tax) depends on the class of income to which it relates.
Gains and losses realised on certain VPST assets are determined by reference to the general capital gains tax provisions (which is consistent with the treatment of disposals of investments by superannuation funds).
The legislation also provides that a “deemed disposal” will arise where there is a transfer between the asset pools of an asset other than money. For tax purposes, an assessable gain may arise for the “transferor” or “transferee” asset pool.
A different rule, being a deferral mechanism, applies where an asset transfer results in a loss for tax purposes.
Similar to the tax treatment for general insurers, investments in the Ordinary Class are usually held on revenue rather than on capital account. Accordingly, profits on the disposal of such investments would be included in assessable income as ordinary income.
Profits and losses on the disposal of investments held in the SEA Class are not taxable or deductible.
Each year, a life company is required to carry out a valuation of its VPST liabilities and exempt policy liabilities. Where the valuation of the corresponding asset pool exceeds the respective value of these liabilities (plus a reasonable provision for tax), the company must transfer the excess out of that asset pool. Where the valuation indicates a shortfall, the company may transfer assets into the pool. Such transfers will have the taxation consequences outlined above.
Management fee income
Where a life insurance company imposes fees and charges on policies included in the asset pools representing the VPST and SEA classes, it is required to transfer an amount equal to those fees and charges out of these pools. This will give rise to an assessable amount in the Ordinary Class, as well as a deduction in the VPST Class, but no deduction in the SEA Class.
This requirement ensures that any fees and charges imposed by the life insurance company are taxed at the prevailing corporate tax rate.
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Investment income
A life insurer is required to separately calculate the investment income from each of its asset pools. This means adequate accounting records must be maintained to separately identify each of these pools, which will differ from the normal statutory fund basis of asset allocation.
Allowable deductions
The current tax provisions are based on the principle that a deduction is allowed for expenses of a revenue nature to the extent they are incurred in gaining or producing assessable income.
A life insurance company is allowed certain specific deductions. These include certain components of life insurance premiums (see below), the risk component of claims paid under life insurance policies, the increase in the value of risk policy liabilities, certain reinsurance premiums and amounts transferred to the SEA Class.
Premiums are fully deductible if they are transferred to the SEA Class, or if they are for policies providing participating or discretionary benefits. Part of the premium may be deductible if they are transferred to the VPST Class.
The deductible component of premiums in respect of ordinary non-participating investment policies would normally be determined by an actuary.
In relation to risk-only policies, such as term insurance policies, deductions will be allowed for the increase in the value of those policy liabilities over the financial year (conversely, decreases will be assessable). An actuary would generally assist in calculating these assessable and deductible amounts.
Allocation and utilisation of losses
A life insurance company remains a single entity for tax purposes but in effect will be divided into three separate taxpayers, each representing a separate class of business. The idea of notional separate taxpayers for each class of business limits the way in which tax losses and capital losses can be used by a life company.
Capital losses from VPST assets can be applied only to reduce capital gains from VPST assets or carried forward to be used in a later year against capital gains derived in the VPST Class. Similarly, capital losses from Ordinary Class assets can be applied only to reduce capital gains from Ordinary Class assets or carried forward to be used in a later year against future capital gains generated by that class.
Ordinary Class revenue losses can only be applied against Ordinary Class assessable income. Similarly, VPST revenue losses can only be applied against VPST assessable income.
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No assessable gains or deductible losses (including capital gains and losses) will arise from the SEA pool.
Certain types of income, including SEA income and income from the disposal of units in a pooled superannuation trust, are classified as “non-assessable non-exempt income”. As a result, tax losses incurred by a life insurance company will not be wasted against these non-assessable non-exempt income amounts before being offset against assessable income.
Imputation credits
A life insurance company is entitled to franking credits in its franking account for the payment of tax on income and/or the receipt of franked dividends attributable to Ordinary Class business. This means that no franking credits are recorded in a life insurance company’s franking account for tax paid on income from assets held in the VPST Class and SEA Class or franked dividends received from assets held in those classes. In this way, the imputation rules for life insurers are consistent with other non- life corporate taxpayers.
A life insurance company is generally entitled to a tax offset for imputation credits attached to dividends received from assets held in the Ordinary Class and VPST Class. Excess imputation credits are refundable to the VPST Class. As the SEA Class does not generate taxable income, any imputation credits generated by the assets in this class are also refundable.
There are special rules for life insurance companies which enable the offset of a franking deficit tax liability against the income tax liability attributable to shareholders business in the Ordinary Class. These rules complement the normal franking deficit provisions which apply to all companies.
Reinsurance with non-residents
Where a life insurance company reinsures all or part of any risk associated with disability policies with a non-resident, a deduction will not be allowed in respect of those premiums and an amount will not be assessable in respect of any recoveries.
The company’s net risk liabilities includes so much of the risk component as is reinsured with the non-resident reinsurer.
However, a life insurance company may elect that this principle does not apply in determining its taxable income, in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, the company’s net risk liabilities do not include the risk component which is reinsured with the non-resident reinsurer.
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HEALTH INSURANCE
An organisation which is a registered health benefits organisation for the purposes of the National Health Act 1953, and which is not in business for the purposes of profit or gain for its individual members, is exempt from income tax. The fact that a health fund may offer rebates and/or discounts to members has not been construed as the distribution of profits or gains to members. Accordingly, the scope of this exemption will depend generally on the type of activities carried out by the organisation insofar as they do not disqualify it from registration under the Act. Registered health benefit organisations that operate for the purposes of profit or gain are treated like general insurers for corporate taxation purposes.
AUTHORISED REPRESENTATIVES AND INSURANCE BROKERS
Tax legislation does not contain specific provisions relating to the taxation of authorised representatives and insurance brokers. One of the important tax issues confronting authorised representatives and insurance brokers is the timing of recognition of commission and brokerage income. The ATO has issued Taxation Ruling IT2626 to provide guidance on this issue. The terms of the contract or arrangement between the insurer and the authorised representative or insurance broker will be of major importance in determining when commission and brokerage income is derived.
An authorised representative or insurance broker is able to recognise an amount of commission or brokerage as income for tax purposes at different points of time.
Examples include:
When that amount has become a recoverable debt and the authorised representative or insurance broker is not obliged to take any further steps before becoming entitled to payment.
When the insurance broker can first withdraw that amount from an insurance broking account.
When that amount has actually been received from the insurer in those situations where the gross premium has been forwarded by the insured directly to the insurer, provided that the receipt by the authorised representative or insurance broker of that amount had not been deferred unreasonably.
When that amount has been withheld by the authorised representative or insurance broker from the net premiums passed onto the insurer.
Which of these different scenarios is most relevant in any particular situation will be influenced by the terms of the contract between the authorised representative or insurance broker and the relevant insurer.
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5Taxation
The authorised representative or insurance broker will be allowed a deduction in the year in which brokerage and commission is refunded where that amount had previously been included in the assessable income of the authorised representative or insurance broker.
5.3 Personal taxation
Table 5.1 – Rates of personal tax for residents from 1 July 2006 (i.e. 2007 rates)
Taxable Income ($) Tax* ($) % on Excess
6,000 NIL 15
25,000 2,850 30
75,000 17,850 40
150,000 47,850 45
*excludes Medicare levy, tax offsets etc
Table 5.2 – Rates of personal tax for residents from 1 July 2007 (i.e. 2008 rates) announced in the 2007 Budget
Taxable Income ($) Tax* ($) % on Excess
6,000 NIL 15
30,000 3,600 30
75,000 17,100 40
150,000 47,100 45
*excludes Medicare levy, tax offsets etc
Table 5.3 – Rates of personal tax for residents from 1 July 2008 (i.e. 2009 rates) announced in the 2007 Budget
Taxable Income ($) Tax* ($) % on Excess
6,000 NIL 15
30,000 3,600 30
80,000 18,600 40
180,000 58,600 45
*excludes Medicare levy, tax offsets etc
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5.4 Levies and premium taxation
GENERAL INSURANCE
Fire brigades legislation
Fire service levies are imposed on various classes of general insurance by state governments in New South Wales, Victoria and Tasmania to fund the cost of providing fire and emergency services. The levies vary in each state with different rates applying to various classes of insurance. However, Western Australia has abolished the levy with effect from 1 January 2004; property owners will fund their fire brigades in future. Policies which include coverage for risks prior to this date must include a proportional contribution to the levy. Audit reports are required on a quarterly basis in respect to the adequacy of systems used to determine the proportional contributions.
Insurance Protection Tax Act (NSW) 2001
The Insurance Protection Tax Act (NSW) 2001, which came into effect on 1 July 2001, imposes a tax on the total annual amount of general insurance premiums received by insurers in New South Wales.
The tax was introduced to establish a fund to assist builders’ warranty and compulsory third-party policyholders affected by the collapse of HIH Insurance Limited. The tax for the year commencing on 1 July 2001 and for each subsequent year is $65 million. The tax for subsequent years may be reduced by determination of the New South Wales Governor on the recommendation of the New South Wales Treasurer. The tax is apportioned among general insurers according to their share of the total premium pool for the relevant year.
Where insurance is undertaken with a non-registered insurer, an ad valorem duty of one per cent is imposed on dutiable premiums.
General Insurance Supervisory Levy Imposition Act 1998 Financial Institutions Supervisory Levies Collection Act 1998
This annual levy is based on a percentage of the value of assets of a general insurance company at a specified date. The unrestricted and restricted levy percentage, the specified date, and the minimum and maximum restricted levy amount for each financial year are determined by the Federal Treasurer (2006/2007: unrestricted levy of 0.007259 per cent of assets; restricted levy of 0.0199 per cent of assets; minimum restricted levy: $4,700; maximum restricted levy: $700,000).
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LIFE INSURANCE
Life Insurance Supervisory Levy Imposition Act 1998 Financial Institutions Supervisory Levies Collection Act 1998
This annual levy is based on a percentage of the value of assets of a life insurance company at a specified date. The unrestricted and restricted levy percentage, the specified date, and the minimum and maximum restricted levy amount for each financial year are determined by the Federal Treasurer (2006/2007: unrestricted levy of 0.000981 per cent of assets; restricted levy of 0.0054 per cent of assets; minimum restricted levy: $470; maximum restricted levy: $700,000).
5.5 Stamp duty
GENERAL INSURANCE
Stamp duty is generally chargeable on the amount of the premium paid in relation to an insurance policy (including any fire service levy where applicable). The amount of GST or reimbursement for GST is generally included in the amount on which duty is calculated. The rates of general insurance duty vary in each state and territory and in some states, by class of insurance.
Generally, the liability for duty on general insurance policies falls on the general insurer.
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Table 5.4 – Stamp duty rates – General insurance products
As at March 2006 Class Rate
NSW Type A Insurance other than Type B or Type C
insuranceType B Insurance for motor
vehicles, aviation, disability, occupational health and hospital
Type C Insurance for livestock, crops
9% 5%
2.5%
VIC, WA, ACT, NT All 10%
QLD Class 1 Insurance other than Class 2 insurance or CTP insuranceClass 2 Insurance such as professional indemnity, motor vehicle (not CTP insurance), personal injury from air travel, first home mortgage, life insurance rider
CTP Insurance
Accident Insurance
7.5% 5%
$0.10
5%
SA All 11%
TAS All 8 %
LIFE INSURANCE
Stamp duty on life insurance is generally calculated on the sum insured. The rates of duty vary in each state and territory. Generally, temporary or term insurance is subject to duty at the rate of 5 per cent of the first year’s premium.
Western Australia no longer imposes stamp duty on life insurance policies entered into after 1 July 2004. Policies entered into prior to this date continue to be subject to life insurance duty at the same rate as New South Wales, Queensland, Tasmania, Australian Capital Territory and Northern Territory. However, life insurance riders which are be categorised as a separate policy of general insurance will continue to be subject to duty at general insurance rates in Western Australia.
Table 5.5 – Stamp duty rates – Life insurance products
As at March 2006 Life insurance Term or temporary insurance
NSW, QLD, TAS, ACT, NT 0.10% of sum insured 5% of first year’s premium
VIC 0.12% of sum insured 5% of first year’s premium
SA 1.5% of premium 1.5% of premium
WA No duty payable No duty payable
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LIFE INSURANCE RIDERS
A life insurance rider is dutiable in all states and territories. In New South Wales and the Australian Capital Territory, the amount of duty chargeable on a life insurance rider is five per cent of the first year’s premium on the rider. In Queensland, a life insurance rider is treated as Class 2 general insurance and attracts duty at the rate of five per cent of the premium to the extent that the premium is paid to affect that class of insurance.
In Victoria, Western Australia, Tasmania and the Northern Territory, a life insurance rider will be subject to the applicable life insurance rate unless the rider is characterised as a separate policy of general insurance, in which case duty is payable at the general insurance rate applying in the relevant jurisdiction (see table 6.4).
Some states have adopted the view that life insurance riders should be characterised as general insurance. However, the correct interpretation of policies and riders will depend on the terms of the specific insurance contracts. Some states have issued revenue rulings dealing with life insurance riders. These rulings should be considered when determining the current rate of duty payable on life insurance riders.
Most states and territories are also participating in a project to create a rewritten “Uniform Life Model” for life insurance duty.
5.6 Goods and Services TaxGST was introduced in Australia with effect from 1 July 2000. Under the Australian GST legislation, different types of insurance are treated differently, leading to different implications for insurers and the insured.
The provision of general insurance is, in most cases, a “taxable supply”. Insurers are required to account for GST of one-eleventh of the premium income collected (excluding stamp duty). They are also entitled to claim input tax credits for the GST included in the price of expenses they incur that relate to making supplies of general insurance (with certain exclusions which apply to all businesses).
There is an exception with regard to the provision of health insurance, which is a GST-free supply (known as “zero-rated supplies” in other jurisdictions). This means that health insurers are not required to account for GST on premium income derived from their businesses, but they are still are entitled to recover input tax credits on the expenses incurred in making supplies of health insurance.
In contrast, the provision of life insurance is usually an “input taxed” supply (known as “exempt supplies” in other jurisdictions), as the supply of an interest in certain life insurance businesses is defined to be a “financial supply” which, in turn, is input taxed for GST purposes. As a result, while life insurers are not required to account for GST on premium income derived from life insurance businesses, they are usually denied full input tax credits on many of the expenses incurred in making supplies of life insurance.
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However, life insurers may be entitled to recover a reduced input tax credit on certain specified expenses. These are known as “reduced credit acquisitions” and are specifically listed in the GST regulations. The current rate of reduced input tax credits is set at 75 per cent of the GST included in the price of particular expenses.
It should be noted that the GST classification of general insurance and life insurance will be different if either supply is made for consumption outside Australia, in which case the supply of these policies may be GST-free. Insurance that is provided as part of certain transport services will lose its character as insurance and will take on the GST character of the other services supplied. For example, insurance provided as part of exporting goods will also be GST-free.
Where an insurance policy may be treated as either GST-free, taxable or input taxed, the GST-free treatment will prevail.
GENERAL INSURANCE
The GST legislation contains complex provisions in respect of general insurance businesses. The effect of these provisions is summarised below.
GST, where applicable, is chargeable on the stamp duty-exclusive amount of the premium. As GST forms part of the “price” of a supply, it constitutes one-eleventh of the price paid for the premium (based on the prevailing GST rate of 10 per cent). Stamp duty will be calculated on the GST-inclusive amount of the premium.
At or before the time a claim on the policy is made, the insured must notify the insurer as to the extent of the input tax credit they are entitled to claim on the policy. Failure to do so could adversely affect the GST position for both the insurer and the insured.
An insurer will not have to account for GST on supplies made in the course of settling a claim if it has received notification from the insured entity of its entitlement to claim input tax credits on the premium paid for the insurance. Furthermore, it can generally claim input tax credits when acquiring goods and services that are to be supplied in settlement of a claim, provided the policy was not initially a GST-free supply.
Where the insured was not entitled to claim an input tax credit in respect of the premium, the insurer is entitled to make a decreasing adjustment mechanism (DAM) in respect of any settlement amount (in the form of cash and/or goods or services) paid out under that policy.
Where the insured was entitled to claim a full input tax credit for GST included in the premium, there is no entitlement to a DAM for the insurer when they make a settlement under the policy.
If the insured is entitled to partial input tax credits on the premium, the insurer is entitled to a partial DAM.
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The receipt of an excess payment can trigger a GST liability as an increasing adjustment for the insurer. The actual liability is based on a specific formula contained in the GST law.
There are special GST rules dealing with the various state and territory-based compulsory third party (CTP) insurance schemes. The new GST laws were introduced in 2003 to address the statutory and working differences between CTP and general insurance businesses.
LIFE INSURANCE
The supply of a life insurance policy is included within the definition of financial supply and, as such, will be input taxed for GST purposes. This means that life insurance companies will not be liable for GST on the supply of life insurance premiums, but will be denied input tax credits for acquisitions that relate to the supply of life insurance (subject to the life insurers being entitled to claim reduced input tax credits).
The meaning of life insurance from a GST perspective is linked to certain provisions of the Life Insurance Act 1995. The GST regulations also stipulate that a supply that is incidental to another financial supply will itself be input taxed, subject to certain criteria being met. Certain products can be declared by APRA to be life insurance, and others will qualify as life insurance due to being related businesses (e.g. certain disability insurance).
Generally, as noted above, the consequence of input taxed classification is that input tax credits are not available for expenditure incurred in connection with making input taxed supplies of life insurance. This means that life insurance companies will not be entitled to recover all the GST included in the price paid for acquisitions of goods and services from suppliers, which has a consequential direct impact on their net costs. However, the GST law also contains provisions which allow financial supply providers to claim reduced input tax credits on certain acquisitions. For life insurers, reduced input tax credit acquisitions include outsourced life policy administration services.
Investment activities
Investment activities are, like life insurance businesses, input taxed in many cases, as they are classified as financial supplies for GST purposes.
The effect of this is that, while GST will not be payable on the supplies made, not all of the GST incurred as part of the price paid for costs associated with investment activities will be recoverable unless one of the following exceptions applies:
The expense relates directly to the purchase or sale of securities or other investments in an overseas market.
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The expenses incurred by the insurer for the purpose of making input taxed financial supplies do not exceed the “financial acquisitions threshold” (which is a “de minimus” test to ensure that entities that make financial supplies are not denied input tax credits on making financial supplies that are not a significant part of their principal commercial activities).
The financial supply is a borrowing and the borrowing relates to supplies which are not input taxed.
Where the above exceptions apply, the insurer retains the entitlement to fully recover the GST incurred on related costs. However, where the exceptions do not apply, the insurer will have to use an appropriate apportionment methodology to determine the extent to which it is entitled to recover GST incurred on general costs.
It should be noted that where acquisitions made by an insurer for the purpose of its investment activities are “reduced credit acquisitions”, the insurer is entitled to claim a reduced input tax credit equal to 75 percent of the GST included in the price of the expense.
Other issues
In addition to specific insurance provisions, insurers must comply with the more general GST requirements that affect all GST-registered enterprises. For example, not all GST on acquisitions is creditable; there is a complex interaction with Fringe Benefits Tax. Also, the GST law takes a broader view of what constitutes ‘consideration’, so in some instances non-monetary forms of consideration could be included within the scope of a supply made for consideration (which may potentially create a liability to GST). Also, guarantees are treated differently from insurance, and distinguishing the two can be extremely complex.
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5.7 Key dates
GENERAL INSURANCE
Stamp duty legislation
Lodgement of returns and payments
New South Wales, Victoria, Australian Capital Territory, Tasmania, Western Australia and the Northern Territory
Within 21 days after the end of each month.
South Australia
Within 15 days after the end of each month. Annual licence to be applied for by 31 January of each year.
Queensland
Within 14 days after the end of each month or such other period as the Commissioner may determine.
Table 5.6 – Fire brigade legislation
Lodgement of returns Payment of charges
NSW – Fire Brigades and Bush Fires
In September each year (audited)
Fire brigadesFire brigades’ quarterly advance payments and bush fires due by 1 July, 1 October, 1 January and 1 April. Advance payments to be adjusted based on returns lodged in September in the following financial year
Bush firesQuarterly payments due on the first day of each quarter
VIC – Metropolitan and Country
Before 15 August each year Metropolitan and countryMetropolitan quarterly advance payments and country due by 1 July, 1 October, 1 January and 1 April. Advance payments to be adjusted based on returns lodged by 15 August in the following year
TAS Within 14 days after the end of each month
Payment made with monthly return
Insurance Protection Act (NSW)
Lodgement of returns by 15 August of each year.
Notices of assessment issued by 1 September of each year.
Quarterly payments due by 15 September, 15 December, 15 March and 15 June of each year.
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General Insurance Supervisory Levy Imposition ActFinancial Institutions Supervisory Levies Collection Act
Due date for payment is specified in the APRA notice (and is not earlier than 28 days after the day on which the notice is given).
GST legislation
Returns and payments are due on the twenty-eighth day following the end of the tax period in respect of quarterly remitters. Returns and payments are due on the twenty- first day following the end of the tax period if the insurer is a monthly remitter.
LIFE INSURANCE
Stamp duty legislation
Lodgement of returns and payments
New South Wales, Australian Capital Territory, Tasmania and Northern Territory
Within 21 days after the end of each month.
Victoria
Within 14 days after the end of each month.
Western Australia
Within 15 days after the end of each month.
South Australia
Annual licence to be applied for by 31 January of each year. Payment upon application.
Queensland
Usually within 14 days after the end of each month (or such other period as the Commissioner may determine).
Life Insurance Supervisory Levy Imposition Act Financial Institutions Supervisory Levies Collection Act
Due date for payment is specified in the APRA notice (and is not earlier than 28 days after the day on which the notice is given).
GST legislation
Returns and payments are due on the twenty-eighth day following the end of the tax period in respect of quarterly remitters. Returns and payments are due on the twenty- first day following the end of the tax period if the insurer is a monthly remitter.
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Insurance legislation 6Commonwealth legislation 158
State and territory legislation 163
Industry codes 163
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6.1 Commonwealth legislationThe insurance industry in Australia is governed by Commonwealth, state and territory laws, and industry codes.
Key legislation and codes affecting the insurance industry include the following:
Australian Prudential Regulation Authority Act 1998
This Act establishes the Australian Prudential Regulatory Authority (APRA) and its powers and duties. Details of the aims and role of APRA are contained in Chapter 2.
Life Insurance Act 1995
The Life Insurance Act sets out, among other things, rules for structuring and managing life companies so that the interests of policyholders and shareholders are protected. APRA is the prudential supervisor of life companies under this Act.
Insurance Act 1973
The Insurance Act governs the solvency and reporting requirements of general insurers and non-operating holding companies. APRA performs prudential supervision under this Act and is responsible for issuing prudential standards.
National Health Act 1953
The National Health Act has established two organisations for the supervision of the health insurance industry. An overview of the aims, scope and functions of the Private Health Insurance Administration Council (PHIAC) is included in Chapter 2. The Private Health Insurance Ombudsman (PHIO) handles complaints relating to private health care.
Financial Sector (Collection of Data) Act 2001
This Act gives APRA the legislative power to collect financial information from regulated entities, including general and life insurers. It is under these powers that annual and quarterly returns are obtained.
Insurance Acquisitions and Takeovers Act 1991 Financial Sector (Shareholdings) Act 1998
These Acts limit shareholdings in insurers to 15 per cent unless otherwise approved by the Federal Treasurer. Similarly, offers to buy more than 15 per cent of an insurer require the Treasurer’s approval.
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Financial Institutions Supervisory Levies Collection Act 1998 General Insurance Supervisory Levy Imposition Act 1998 Life Insurance Supervisory Levy Imposition Act 1998 Authorised Non-Operating Holding Companies Supervisory Levy Imposition Act 1998
These Acts provide the legislative backing to collect annual fees from licensed insurers and authorised non-operating holding companies. The fees contribute to the operating costs of APRA.
From 1 July 2005, financial sector levies comprise two distinct components:
Restricted levy – This component relates to the cost of supervision and involves a single levy rate for each of the financial sectors examined by APRA. It includes an annual cap on this component of the levy; and
Unrestricted levy – This component factors in size and complexity considerations. It is a low rate levy on assets without any maximum levy amount.
The General Insurance Supervisory Levy Imposition Amendment Bill 2006 is currently before Parliament. The proposed amendments permit different levies to be applied for different classes of general insurance companies. The amendments apply for the financial year commencing on 1 July 2006.
Private Health Insurance (Council Administration Levy) Act 2003 Private Health Insurance (Collapsed Organisation Levy) Act 2003 Private Health Insurance (ACAC Review Levy) Act 2003 Private Health Insurance (Reinsurance Trust Fund Levy) Act 2003
These Acts were introduced to ensure the ongoing validity of health insurance levies in terms of the requirements of Section 55 of the Constitution of the Commonwealth of Australia, which states that laws of taxation must concern taxation only.
Private Health Insurance Complaints Levy Act 1995
This Act provides the legislative backing to collect annual fees from registered health benefits organisations to fund the operating costs of the PHIO.
Corporations Act 2001
The Corporations Act requires the seller of certain types of financial products (including insurance products) to hold an Australian Financial Services Licence (AFSL) and provide certain product disclosures when selling financial products. In addition, licence holders that are not regulated by APRA (e.g. insurance brokers) must comply with specified solvency requirements. The Australian Securities and Investments Commission (ASIC) is responsible for the supervision of licensing and compliance with the Act.
How the Corporations Act applies to insurance companies largely depends on whether they are selling wholesale or retail financial products as defined by the Act. The sale of
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retail financial products is more stringently regulated than the sale of wholesale products. The definition of “retail” under the Act covers both individuals and small business. Generally speaking, the financial products defined by the Act include both life risk and investment risk products for life insurers, and all general insurance products. The definition of “financial products” explicitly excludes reinsurance and health insurance.
Refinements to the regulations associated with the sale and distribution of financial products were finalised in December 2005. The regulations aim to provide simple oral and streamlined disclosure in relation to basic deposit products and general insurance products.
Further information is contained in Chapters 2 and 3.
Insurance Contracts Act 1984 Marine Insurance Act 1909
The Insurance Contracts Act governs the issue of policies for many classes of insurance but excludes reinsurance, health insurance, compulsory third-party motor insurance and workers compensation. It applies to all consumer insurance contracts and is supervised by ASIC. Following the implementation of the Australian Financial Services Licensing regime, the Act largely relates to disclosures required from the insured. All other insurer-related disclosure requirements have been incorporated into the Corporations Act.
The Marine Insurance Act applies to all marine insurance contracts except those covering pleasure craft, which are governed by the Insurance Contracts Act.
Health Insurance Act 1973 Health Insurance Commission Act 1973
These Acts govern the operation of the national medical system, Medicare, and its operator, the Health Insurance Commission (HIC).
Private Health Insurance Incentives Act 1998
The Private Health Insurance Incentives Act provides for a 30 per cent rebate on health insurance premiums paid directly to either health insurers or to the policyholder.
Terrorism Insurance Act 2003
The Terrorism Insurance Act provides for insurance coverage of declared terrorist acts and renders terrorism exclusion clauses ineffective for commercial property located in Australia. The Act establishes a statutory corporation, the Australian Reinsurance Pool Corporation (ARPC), that provides reinsurance to registered insurers that do not wish to retain the risk of terrorism coverage themselves or obtain reinsurance from other reinsurers.
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Privacy Act 1988
All companies with turnover of more than $3 million, including insurance companies, are subject to the Privacy Act. This imposes obligations on how companies collect and handle personal information and aims to protect individuals who give such information to organisations. Compliance with privacy requirements is monitored by the Federal Privacy Commissioner.
Australian Securities Investments Commission Act 2001 (ASIC Act)
Companies that sell insurance products must comply with the consumer protection provisions of the ASIC Act. The Act prohibits false or misleading advertising.
Trade Practices Act 1974
The Trade Practices Act addresses the promotion of competition and fair trading.
Specific sections cover anti-competitive practices and price exploitation. The Act also establishes the Australian Competition and Consumer Commission (ACCC) to oversee the promotion of competition and fair trading.
The Act was recently changed to close a perceived loophole that allowed litigants to bypass state and territory laws, and make claims under this Act for personal injuries and death.
Prices Surveillance Act 1983
The Prices Surveillance Act is administered by the ACCC, which works with the Consumer Affairs Division of the Department of Treasury and ASIC to protect consumer interests. Under this Act, the ACCC is empowered to conduct pricing enquiries and vet price rises of businesses under prices surveillance. Medical indemnity insurance, public liability and professional indemnity insurance are currently subject to monitoring. The ACCC monitored medical indemnity premiums for three years to assess whether they were actuarially and commercially justified. The last of the three annual monitoring reports was released in December 2005.
Medical Indemnity Act 2002 Medical Indemnity Agreement (Financial Assistance Binding Commonwealth Obligations) Act 2002 Medical Indemnity (Consequential Amendments) Act 2002 Medical Indemnity (UMP Support Payment) Act 2002 Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 Medical Indemnity (Run-off Cover Support Payment) Act 2004 Medical Indemnity (Competitive Advantage Payment) Act 2005 Medical Indemnity Legislation Amendment (Competitive Neutrality) Act 2005
The above legislation regulates the operations of Medical Defence Organisations (MDOs)
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and provides guarantees and assistance to enable them to meet their claims obligations. With effect from 1 July 2003, only registered insurers, including those owned by MDOs, are permitted to offer medical indemnity insurance. The legislation outlines the minimum coverage that medical indemnity products must provide and stipulates that such products must provide “claims-made” coverage. The legislation includes:
transitional provisions for the improvement of the capital adequacy of MDOs;
funding of half the cost of claims over $300,000 by the HIC;
a premium support scheme, providing a subsidy to doctors with excessive premiums; and
a run-off cover scheme, providing eligible retired doctors coverage for claims at a nominal cost. The run-off cover scheme is funded by a levy on the premiums of medical indemnity insurers.
An independent review of competitive neutrality in the medical indemnity insurance market was performed in early 2005. The review found that the specific assistance given to United Medical Protection Limited (“United”) had resulted in a competitive advantage. The review suggested that this arose because the Australian Government had taken over all of United’s legacy commitments, allowing it, unlike other medical indemnity providers, to concentrate only on the future.
The review recommended that to redress the balance it would be necessary for United to make a series of regular payments to compensate the Government for assuming its obligations. The Government accepted these recommendations and the first contribution year started on 1 July 2005 and will end on 1 July 2014, although the final year can be brought forward by regulations. Further, the payments the Government will receive from United (termed “competitive advantage payment”) will be used to reduce the payments doctors make under the United Medical Protection Support Payment (UMP SP) scheme. Under the new arrangements, members’ payments will be reduced by $1,000 annually. The number of contribution years will also be reduced from six to four years.
The Government recently outlined possible amendments to the prudential and product standards of the Medical Indemnity (Prudential Supervision and Product Standards) Act. In 2006, Federal Treasury sought and received feedback about these proposals from various industry bodies. Comment was sought on a range of topics, including:
Implications of requiring APRA authorisation of entities indemnifying medical practitioners, but not requiring this for entities indemnifying other healthcare professionals;
Whether the product standards targeted at employed medical practitioners were necessary; and
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Whether regulatory flexibility in prudential supervision is necessary to allow the Government to respond to the market as it evolves or whether this would introduce uncertainty for medical indemnity providers.
6.2 State and territory legislationThere is a range of state and territory-based regulations that complements the Commonwealth legislation including:
Workers compensation legislation;
Compulsory third-party legislation;
Privacy legislation; and
Fair trading legislation.
6.3 Industry codes
GENERAL INSURANCE CODE OF PRACTICE
The General Insurance Code of Practice is a self-regulatory code developed and administered by the Insurance Council of Australia (ICA) and approved by ASIC. An independent review of the Code was completed in November 2004, and in response a new General Insurance Code of Practice was released on 18 July 2005.
The new code was designed to improve customer service standards in the Australian insurance industry and protect the rights of policyholders. All members of the general insurance industry are encouraged to adopt the standards set out in the code whilst ICA members are requested to adopt the code. The Insurance Ombudsman service (103) monitor and report on compliance with the code.
Nearly all types of general insurance, from house to travel and multi-million dollar business insurance, is included in the Code. The only types of general insurance that are not included are reinsurance (insurance for insurers) and insurance that has specific rules under Government statute. The Code is intended to be a “living Code”, which will be progressively developed after consultation with Government and other interested groups. The Code will be reviewed every three years and any amendments will be subject to the approval of ASIC.
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GENERAL INSURANCE BROKERS’ CODE OF PRACTICE
This Code was developed by the National Insurance Brokers Association (NIBA). Most Australian brokers subscribe to it. The Code is administered by Insurance Brokers Disputes Limited, who resolve disputes and receive annual complaints’ reports. Compliance with the Code is monitored by the Insurance Brokers’ Compliance Council, which comprises a consumer representative, a NIBA representative and an industry representative.
Insurance directory 7Government authorities 166
Industry associations 170
Complaints review services 181
Registered general insurers 183
Registered life insurers 188
Registered health insurers 190
Government insurers 192
PwC Australian offices and industry experts 193
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7.1 Government authoritiesGovernment bodies that undertake insurance activities (e.g. Victorian Workcover Authority) are listed in the government insurers section of this chapter.
ACT WORKCOVER
ACT Workcover is a government agency whose role is to prevent death, disease and injury in the workplace. Its work is supported by three main acts: the Occupational Health and Safety Act 1989, the Workers Compensation Act 1951 and the Dangerous Substances Act 2004. ACT Workcover oversees the operations of registered insurers that provide workers’ compensation insurance.
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
The roles and responsibilities of Australian Prudential Regulation Authority (APRA) are discussed in detail in Chapter 2 of this publication.
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
The roles and responsibilities of Australian Securities and Investments Commission (ASIC) are discussed in detail in Chapter 2 and 4 of this publication.
Level 3, Block B Callam offices Easty Street Woden ACT 2606 www.workcover.act.gov.au
Acting Commissioner
Tel: (02) 6205 0200 Fax: (02) 6205 0336 Email: [email protected]
Mr S Hart
Level 26 400 George St Sydney New South Wales 2000 www.apra.gov.au
Chairman
Tel: (02) 9210 3000 Fax: (02) 9210 3411 Email: [email protected]
Mr J Laker
PO Box 4000 Gippsland Mail Centre Victoria 3841 www.asic.gov.au
Chairman Commissioner
Tel: (03) 5177 3988 Fax: (03) 5177 3999 Email: [email protected]
Mr J Lucy Mr T D’Aloisio
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MOTOR ACCIDENT INSURANCE COMMISSION
The Motor Accident Insurance Commission is the regulatory authority responsible for the management of the compulsory third-party (CTP) scheme in Queensland and insurers licensed under the scheme. Established under the Motor Accident Insurance Act 1994, the commission commenced operations on 1 September 1994 as a statutory body reporting to the state Treasurer. The chief executive is the Insurance Commissioner who, in this capacity, is also the Nominal Defendant.
The commission is funded by a statutory levy payable with the CTP insurance premium. Interest earned on investments of the Motor Accident Insurance Fund and revenue from compliance fines, combined with a small surplus from the statutory levy, fund the commission’s research initiatives.
MOTOR ACCIDENTS AUTHORITY
The Motor Accidents Authority (MAA) is a statutory corporation established to administer the NSW Motor Accidents Scheme, the CTP personal injury insurance scheme for motor vehicles registered in New South Wales. The major aim of the authority is to lead and support a CTP scheme that minimises the impact of motor vehicle accidents.
Level 9 33 Charlotte Street GPO Box 1083 Brisbane Queensland 4001 www.maic.qld.gov.au
Insurance Commissioner
Tel: (07) 3227 8088 Fax: (07) 3229 3214 Email: [email protected]
Ms L Anderson
Level 25 580 George St Sydney New South Wales 2000 www.maa.nsw.gov.au
Chairman General Manager
Tel: 1300 137 131 Fax: 1300 137 707 Email: [email protected]
Mr R Grellman Mr D Bowen
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PRIVATE HEALTH INSURANCE ADMINISTRATION COUNCIL
The role and responsibilities of the Private Health Insurance Administration Council (PHIAC) are discussed in detail in Chapter 2 of this publication.
WORKCOVER WESTERN AUSTRALIA
WorkCover’s mission is to minimise the social and economic impact on workers of work-related injury and disease and achieve cost effectiveness for employers and the community. To ensure the state’s workers compensation and rehabilitation scheme runs smoothly for the people of Western Australia, WorkCover:
provides information and community education on all aspects of the scheme
monitors compliance with the Act to ensure employers are insured for workers compensation to their full liability
promotes the injury management and vocational rehabilitation of injured workers to help them successfully return to work
ensures all workers employed in a prescribed noisy workplace have the necessary hearing tests
provides a conciliation and review process to resolve disputed workers compensation matters
undertakes research and provides statistics in the areas of rehabilitation, injury prevention and noise-induced hearing loss.
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Suite 16, Level 1 71 Leichhardt St Kingston Australian Capital Territory 2604 www.phiac.gov.au
Chief Executive Officer
Tel: (02) 6215 7900 Fax: (02) 6215 7977 Email: [email protected]
Ms G Ginnane
2 Bedbrook Pl Shenton Park Western Australia 6008 www.workcover.wa.gov.au
Executive Director Chairman
Tel: (08) 9388 5555 Toll free: 1300 794 744 Fax: (08) 9388 5550 Email: [email protected]
Mr A Warner Mr A Cooke
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WORKPLACE STANDARDS TASMANIA
Workplace Standards Tasmania is a division of the Department of Infrastructure, Energy and Resources and is responsible for administering much of the legislation that regulates business in Tasmania. Occupational health and safety and workers compensation, long service leave, shop trading hours, bank holidays and some occupational registrations are key areas. It also has responsibility for many industrial relations matters. An employer may obtain workers’ compensation insurance by choosing an insurance company licensed by Workplace Standards Tasmania.
Lower Level 30 Gordons Hill Rd Rosny Park Tasmania 7018 www.wst.tas.gov.au
Director of Industry Safety
Tel: (03) 6233 7657 Toll free: 1300 366 322 Fax: (03) 6233 8338 Email: [email protected]
Mr S Hyam
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7.2 Industry associations
ASSOCIATION OF FINANCIAL ADVISERS LTD
Originally formed as the Life Underwriters Association of Australia & New Zealand. the Association of Financial Advisers (AFA) provides training courses for the financial services industry. AFA training courses cover risk management (life and general insurance), superannuation, estate planning and investment planning.
AUSTRALASIAN INSTITUTE OF CHARTERED LOSS ADJUSTERS
The Australasian Institute of Chartered Loss Adjusters (AICLA) is the Australian and New Zealand organisation of professionals in the loss adjusting business. Its object is the elevation of standards in loss adjusting in Australia, NZ and South-East Asia. Loss adjustors must pass an examination to join the institute. AICLA runs a tiered examination system for loss adjusters, including a diploma in business loss adjusting, through the Australian and New Zealand Institute of Insurance and Finance.
Level 1 39 Geils Crt Deakin Australian Capital Territory 2600 www.afa.asn.au
President Treasurer
Tel: (02) 6285 1986 Fax: (02) 6285 2022 Email: [email protected] Tollfree: 1800 656 009
Mr M Murphy Mr H Crawford
GPO Box 1705 Brisbane Queensland 4001 www.aicla.org
President Secretary/Administrative Officer
Tel: (07) 3229 6663 Fax: (07) 3221 7267 Email: [email protected]
Mr S Thorpe Mr T Libke
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AUSTRALASIAN INSTITUTE OF MARINE SURVEYORS
The institute was formed in New South Wales and provides technical assistance to members who are qualified marine surveyors. It also provides information to members of the public who may seek the services of a marine surveyor.
AUSTRALIAN FRIENDLY SOCIETIES ASSOCIATION
The Australian Friendly Societies Association (AFSA) is the peak industry body for friendly societies and has some 100 members. It negotiates with government on behalf of members, maintains a professional statistical database, conducts training sessions and seminars, and advises members on compliance.
AUSTRALIAN HEALTH INSURANCE ASSOCIATION LTD
The Australian Health Insurance Association (AHIA) is an industry association with 26 registered health fund members. These funds represent 94 per cent of the population covered by private health insurance. AHIA provides members with research and statistical services, including assistance with technical matters. It liaises with federal and state governments and other industry organisations, and provides media comment on behalf of the health insurance industry.
PO Box 53 Berowra New South Wales 2081 www.aimsurveyors.com.au
President Secretary/Treasurer
Email: [email protected]
Capt S C Beale Capt O A Castellino
Lakeside Business Centre Level 4, 150 Albert Road South Melbourne Victoria 3205 www.afsa.com.au
President Executive Director
Tel: (03) 9685 7543 Fax: (03) 9685 7599 Email: [email protected]
Mr C Wright Ms J Southwell
4 Campion St Deakin Australian Capital Territory 2600 www.ahia.org.au
President Chief Executive Officer
Tel: (02) 6285 2977 Fax: (02) 6285 2959 Email: [email protected]
Mr T Smith The Honourable Dr Michael Armitage
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AUSTRALIAN HEALTH SERVICE ALLIANCE LTD
The Australian Health Service Alliance (AHSA) is a company that represents 24 of the 43 Registered Private Health Funds across Australia. It is responsible for facilitating arrangements between hospitals, doctors and health service providers on behalf of its member funds. Its services include:
arranging business partnership agreements for members with about 467 private hospitals and other health care providers
reviewing hospital services
development of episodic (case-mix) billing and payment models for purchasing health care services
development of medical-provider contracts with doctors
industry based research to add value to funds and their members
collecting, merging, verifying, auditing and dispatching Hospital Case-mix Protocol data for 24 health funds from about 467 hospitals.
AUSTRALIAN INSURANCE LAW ASSOCIATION
The Australian Insurance Law Association (AILA) is the Australian section of the International Association for Insurance Law (AIDA).AIDA was founded in the 1960s in Luxembourg and now has more than 55 national sections worldwide. The not-for-profit organisation aims to promote collaboration between industry officials and practising lawyers and academics by providing a forum for the review and development of insurance law through seminars, workshops and conferences.
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979 Burke Rd Camberwell Victoria 3124 www.ahsa.com.au
Chairman Chief Executive Officer
Tel: (03) 9813 4088 Fax: (03) 9813 4099 Email: [email protected]
Mr D Abraham Mr D King
38 Ellingworth Pde Box Hill Victoria 3128 www.aila.com.au
President
Tel: (03) 9898 9221 Fax: (03) 9890 6310 Email: [email protected]
Mr S Knight
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AUSTRALIAN & NEW ZEALAND INSTITUTE OF INSURANCE AND FINANCE
The institute is the professional organisation in Australia, New Zealand and South-East Asia for persons engaged in insurance business and is concerned with education, training and professional development in all branches of insurance. The institute conducts direct examinations, mainly in insurance subjects, to educate and promote the career progression of insurance professionals. On completion, qualified persons may be elected as fellows, senior associates and members of the institute. It runs discussion groups and clubs throughout Australia and New Zealand.
FINANCE SECTOR UNION OF AUSTRALIA
The Finance Sector Union of Australia (FSU) represents employees in the finance industry in Australia. It is committed to fostering members’ ambitions and protecting their rights and interests in accordance with the objectives of the union and relevant industrial laws. It advises and supports employees, and aims to ensure their needs are met.
The FSU is a registered organisation under the Workplace Relations Act 1996 and is affiliated with the Australia Council of Trade Unions. It has branches in all states and national offices in Melbourne and Sydney. Full-time officials are elected for a four-year term by members.
Level 17 31 Queen St Melbourne Victoria 3000 www.theinstitute.com.au
President Chief Executive Officer
Tel: (03) 9613 7200 Fax: (03) 9613 7299 Email: [email protected]
Mr I Brown Ms J Fitzpatrick
341 Queen St Melbourne Victoria 3000 www.fsunion.org.au
President National Secretary
Sydney/ACT: Level 2, 321 Pitt St Sydney New South Wales 2000
Tel: (03) 9261 5300 Fax: (03) 9261 5481 Email: [email protected]
Ms C Gordon Mr P Schroder
Tel: (02) 9320 0000 Fax: 02 9320 0098 Email: [email protected]
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FINANCIAL SERVICES ACCOUNTANTS ASSOCIATION LTD
The Financial Services Accountants Association (FSAA) was formed in 2000 from the merger of two industry accounting bodies, one involved with general insurance, the other with life insurance. The unified group aims to provide better service to its members, which include accountants and finance managers. Its services include training and development programs. Through the FSAA network, colleagues exchange ideas and keep abreast of developments in the industry.
HEALTH INSURANCE RESTRICTED MEMBERSHIP ASSOCIATION OF AUSTRALIA INC
The Health Insurance Restricted Membership Association of Australia (HIRMAA) is an association of 14 not-for-profit employee-based registered health insurance funds. It represents member funds in discussions with the Department of Health and PHIAC.
PO Box 141 Brookvale Business Centre New South Wales 2100 www.fsaa.com.au
Federal President Administrator
Tel: (02) 9451 3223 Fax: (02) 9451 3234 Email: [email protected]
Mr R Sanzin Ms S Philp
PO Box 172 2/826 Whitehorse Rd Box Hill Victoria 3128 www.hirmaa.com.au
Executive Director
Tel: (03) 9896 9370 Fax: (03) 9896 9393 Email: [email protected]
Mr R Wilson
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IBNA LTD
IBNA (formerly Insurance Brokers Network Australia Ltd) is a network of more than 80 accredited insurance brokers throughout Australia. Members provide products and services to IBNA shareholders, clients and underwriters.
INSTITUTE OF ACCIDENT ASSESSORS
The institute is a professional body formed in New South Wales and provides technical assistance to members who are qualified automotive loss assessors in all states of Australia.
INSTITUTE OF ACTUARIES OF AUSTRALIA
The institute’s main objectives are to:
enhance the status of the actuarial profession in Australia
make representations to governments and other bodies on matters with actuarial implications
encourage the study of actuarial science
provide a forum for discussion of matters of interest to the profession.
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PO Box 426 Suite 103A 242 Beecroft Rd Epping New South Wales 2121 Epping NSW 1710 www.ibna.com.au
Managing Director Chief Executive Officer
Tel: (02) 9868 8050 Fax: (02) 9869 7119 Email: [email protected]
Mr P Imeson Mr P Sedgwick
11-13 Byrne St Auburn New South Wales 2144 www.motorassessors.com.au
President
Tel: (02) 9648 1412 Fax: (02) 9648 4241 Email: [email protected]
Mr P Marks
Level 7, Challis House 4 Martin Pl Sydney New South Wales 2000 www.actuaries.asn.au
President Chief Executive Officer
Tel: (02) 9233 3466 Fax: (02) 9233 3446 Email: [email protected]
Mr F Rowley Mr J Maroney
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INSTITUTE OF PUBLIC INSURANCE ASSESSORS INC
The institute was formed in 1993 with the broad aims of promoting the profession of public-loss assessing, maintaining professional standards and widening consumer awareness of the service. Its objectives are:
to maintain an institute for members who act for policyholders in the preparation, negotiation and settlement of insurance claims
to ensure members maintain a professional standard of conduct and abide by the ethics of the institute
to provide a forum for co-operation and exchange of information among members and related organisations
to encourage and assist in the education of members, prospective members and related individuals and organisations
to ensure the public has access to the same claims-handling expertise as insurance companies
to promote the service to the public and relevant organisations.
The institute has close ties with sister organisations in the UK (the Institute of Public Loss Assessors or IPLA) and the US (the National Association of Public Insurance Adjusters or NAPIA).
INSURANCE ADVISERS ASSOCIATION OF AUSTRALIA INC
The Insurance Advisers Association of Australia’s (IAAA) 220 members are insurance agents providing insurance sales, service and advice to consumers. IAAA encourages the professional development of members and has a Certified Professional Insurance Adviser (CPIA) program, requiring yearly training that allows a member to retain certification.
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Suite 1 6 Boronia St Wollstonecraft New South Wales 2065
President Administrator
Tel: (02) 9437 3066 Fax: (02) 9437 3066 Email: [email protected]
Mr M Arnold Ms L Caporn
PO Box 597 St Albans Victoria 3021 www.iaaa.com.au
President Chief Executive Officer
Tel: (03) 9390 9355 Fax: (03) 8390 7877 Email: [email protected]
Mr B Enever Mr M Morgan
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INSURANCE COUNCIL OF AUSTRALIA LTD
The Insurance Council of Australia (ICA) represents the interests of the general insurance industry. The Council was formed in 1975 and operates as an independent, not-for-profit organisation wholly owned by its members. The Council represents its members, handles issues and develops industry positions through government lobby, public affairs, industry forum, issues management and consumer services – all of which are backed up by technical and research resources.
Head Office
President Executive Director
Level 3 56 Pitt St Sydney New South Wales 2000
Mr J F Mulcahy Ms K Kelly
Tel: (02) 9253 5100 Fax: (02) 9253 5111 www.insurancecouncil.com.au
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INSURANCE PREMIUM FINANCE ASSOCIATION OF AUSTRALIA LTD
The association’s primary role is educational and concerned with self-regulation and dispute resolution. It provides legal advice and works to raise awareness of compliance issues among members. The premium funders are generally owned by the insurance industry and a large part of the funds are sourced from insurance companies.
INSURANCE REFERENCE SERVICES
The Insurance Reference Services (IRS), Australia’s only national register of insurance claims, was established in 1991 and is owned and controlled by the insurance industry.
It aims to help the industry fight fraud. The IRS provides a comprehensive and easily accessible source of insurance and commercial credit and public record information, and holds more than 18 million claims from all major classes of general insurance throughout Australia. IRS provides services to members through an agreement with Baycorp Advantage.
c/- KPMG Level 4 161 Collins St Melbourne Victoria 3000
President
Mr T Priddle
Level 5 90 Arthur St North Sydney New South Wales 2060 irs.au.baycorpadvantage.com
Chairman Manager
Tel: (02) 9464 6000 Toll free: 133 124 Fax: (02) 9951 7676 Email: [email protected]
Mr P Cooper Mr M Walker
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INVESTMENT AND FINANCIAL SERVICES ASSOCIATION
The Investment and Financial Services Association (IFSA) is a national not-for-profit association representing the investment and financial services sector. Its member companies provide managed investments, superannuation, life insurance and other financial services. IFSA represents members in dealings with governments, the media and the community. The Australian Retirement Income Streams Association merged with IFSA in 2002.
IFSA’s mission is to play a role in the development of the social, economic and regulatory framework in which members operate, and help them to serve their customers better. IFSA works closely with legislators, regulators and other key shareholder groups to promote industry efficiency and ensure an effective and workable regulatory environment.
MEDICAL INDEMNITY INSURERS’ ASSOCIATION OF AUSTRALIA
The Medical Indemnity Insurer’s Association of Australia (MIIAA) exists in order to:
Inform and influence the national dialogue, debate and policy setting on matters relating to the systems of medical risk management and compensation for medical harm.
Represent the voice of all insured doctors in such debates and policy setting.
Enhance the reputation of the member organisations as major contributors to the well being of the profession and the community.
Collaborate on the negotiation and implementation of government policy, legislation and regulation.
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Suite 1, Level 24 44 Market St Sydney New South Wales 2000 www.ifsa.com.au
Chairman Chief Executive Officer
Tel: (02) 9299 3022 Fax: (02) 9299 3198 Email: [email protected]
Mr C Dunn Mr R Gilbert
Level 24 Santos House 91 King William St Adelaide South Australia 5000
President
Tel: (08) 8113 5312 Email: [email protected]
Ms M Anderson
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NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA
The National Insurance Brokers Association of Australia (NIBA) is an independent organisation of about 500 brokers representing the interests of members to the community, government and industry. Its services include technical and educational support for brokers. Initiatives for improvement of the industry include the Qualified Practising Insurance Broker (QPIB) program. QPIBs must meet rigid requirements in addition to those required for government registration. NIBA brokers abide by the general insurance brokers’ code of practice and subscribe to the Insurance Brokers Dispute Facility.
RISK MANAGEMENT INSTITUTE OF AUSTRALAISIA
The Risk Management Institution of Australasia Ltd is a company limited by guarantee dedicated to advancing the discipline and practice of risk management. It was incorporated in 2003, following decisions by members of the Australasian Institute of Risk Management Limited (AIRM) and ARIMA Limited to merge to form a new organisation.
Level 18 111 Pacific Hwy North Sydney New South Wales 2060 www.niba.com.au
President Chief Executive Officer
Tel: (02) 9964 9400 Fax: (02) 9964 9332 Email: [email protected]
Mr P Goddard Mr N Pettersen
Po Box 97 Carlton South Victoria 3053 www.rmia.org.au
President
Tel: (03) 8341 1000 Fax: (03) 9347 5575 Email: [email protected]
Mr G Whitehorn
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7.3 Complaints review servicesThe role and responsibilities of each complaints review service are discussed in the sources of redress section of Chapter 3.
FINANCIAL INDUSTRY COMPLAINTS SERVICE LTD
INSURANCE BROKERS DISPUTES LTD
INSURANCE OMBUDSMAN SERVICE
P.O. Box 579 Collins Street West Melbourne Victoria 8007 www.fics.asn.au
Chairman Chair of the Panel Chief Executive Officer
Tel: (03) 8623 2000 Toll free: 1300 780 808 Fax: (03) 9621 2291 Email: [email protected]
Mr M Arnold Mr M Croyle Ms A Maynard
Level 5 31 Queen Street Melbourne Victoria 3000 www.ibdltd.com.au
Chairman Referee Compliance Manager
Tel: (03) 9613 7366 Toll free: 1300 780 808 Fax: (03) 9620 0166 Email: [email protected]
Mr R Smith Mr D Letcher Mr D Kirchlinde
PO Box 561 Collins St West Melbourne Victoria 8007 www.iecltd.com.au
Chairman Insurance Ombudsman
Tel: (03) 9613 6300 Toll free: 1300 780 808 Fax: (03) 9621 2060 Email: [email protected]
Mr P E Daly Mr S Parrino
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PRIVATE HEALTH INSURANCE OMBUDSMAN
Level 7 362 Kent Street Sydney New South Wales 2000 www.phio.org.au
Acting Ombudsman
Tel: (02) 8235 8777 Toll free: 1800 640 695 Fax: (02) 8235 8778 Email: [email protected]
Ms S Gravel
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7.4 Registered general insurersACE Insurance LtdTel: (02) 9335 3200
www.aceinsurance.com.au
A.F.G. Insurances LtdAsset Insure Pty LtdTel: (02) 9251 8055
www.assetinsure.com.au
Aioi Insurance Co LtdTel: (02) 9278 4888
www.ioi-sonpo.co.jp/en/index.html
Alea London Ltd Tel: (02) 9274 3000
www.aleagroup.com
Allianz Australia Insurance LtdTel: 13 10 00
www.allianz.com.au
American Home Assurance CoTel: (02) 9522 4000
www.aig.com.au
American International Assurance Co(Australia) LtdTel: 1800 333 613
www.aiaa.com.au
American Re-Insurance Co Tel: (02) 8247 6100
www.amre.com
AMPG (1992) LtdTel: (02) 9257 5000
www.amp.com.au
ANZcover Insurance Pty LtdTel: 13 13 14
www.anz.com.au
ANZ General Insurance Pty LtdTel: (02) 9234 8111
www.anz.com.au
ANZ Lenders Mortgage Insurance Pty LtdTel: (02) 9234 8111
www.anz.com.au
Atradius Credit Insurance N.V.Tel: (02) 9201 5222
www.atradius.com/au
Australasian Medical Insurance Ltd (Trading as United Medical Protection)Tel: (02) 9260 9000
www.amil.com.au
Australian Alliance Insurance Co LtdTel: 13 50 50www.apia.com.auwww.shannons.com.au www.abbi.com.au
Australian Associated Motor Insurers LtdTel: (03) 8520 1300
www.aami.com.au
Australian Finance GroupTel: (02) 8908 3600
www.afgonline.com.au
Australian International Insurance LtdTel: (02) 9424 1700
www.oamps.com.au
Australian Unity General Insurance Ltd Tel: (03) 9697 0111
www.australianunity.com.au
AXA Insurance Australia LtdTel: 131 737
www.axa.com.au
Barristers’ Sickness and Accident Fund Pty LtdTel: (02) 9232 4055
www.nswbar.asn.au
BHP Billiton Marine & General Insurances Pty Ltd Tel: (03) 9609 3015
www.bhpbilliton.com
Boral Insurance Pty LtdTel: (02) 9220 6300
www.boral.com.au
Budget Direct Insurance Agency
Tel: 1300 306 560
Calliden Group LtdTel: (02) 9551 1111
www.calliden.com.au
Calliden LtdTel: (02) 9551 1111
www.calliden.com.au
Catholic Church Insurances LtdTel: (03) 9934 3000
www.ccinsurances.com.au
Cavell Insurance Co Ltd
Tel: (02) 9007200
CGU Insurance LtdTel: (03) 9601 8222
www.cgu.com.au
CGU-VACC Insurance LtdTel: (03) 9601 8222
www.cgu.com.au
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Chubb Insurance Co of Australia LtdTel: (02) 9273 0100
www.chubb.com
CIC Allianz Insurance LtdTel: 13 26 64
www.allianz.com.au
Colonial Protection Insurance Pty Ltd
Level 7, 48 Martin Pl, Sydney 2000
Combined Insurance Co of America (trading as Combined Insurance Co of Australia)Tel: 1300 300 480
www.combined.com
Commonwealth Insurance LtdTel: 13 24 23
www.comminsure.com.au
Commonwealth Steamship Insurance
Tel: (03) 8603 1000
Converium LtdTel: (02) 9274 3000
www.converium.com
Copenhagn Reinsurance Co Ltd (The)
Tel: (02) 9247 7266
Corrvas Insurance Pty LtdTel: (03) 9270 7270
www.ansell.com.au
Credicorp Insurance Pty LtdTel: 13 32 82
www.cua.com.au
Cumis Insurance Society Inc (as a part of the Cuna Mutual Group)Tel: (02) 9295 5555
www.cumis.com
Curasalus Insurance Pty Ltd (formerly known as Orica Insurance Pty Ltd)Tel: (03) 9665 7111
www.orica.com.au
EIG Ansvar LtdTel: 1300 650 540
www.eigansvar.com.au
Elders Insurance LtdTel: (02) 8251 9000
www.elders.com.au
Employers Mutual Ltd Tel: (02) 8251 9000
www.emia.com.au
Employers Reinsurance Corporation Level 34, 60 Margaret St, Sydney 2000Tel: (02) 9394 2800
www.swissre.com
Farmers’ Mutual Insurance Ltd (Trading as FMG Insurance Limited)Tel: (02) 6041 2611
www.fmginsurance.com.au
First American Title Insurance Co of Australia Pty Ltd (Trading as First Australian Titles)Tel: (02) 8235 4433
www.firsttitle.com
FM Insurance Co LtdTel: (03) 9609 1300
www.fmglobal.com
Fortron Insurance Group LtdTel: (08) 9202 5300
www.fortron.com.au
General ReInsurance Australia LtdTel: (02) 8236 6100
www.genre.com
Gerling Australia Insurance Co Pty LtdTel: (02) 8274 4200
www.gaus.com.au
GIO General LtdTel: (03) 8650 4111
www.gio.com.au
Gordian Runoff Ltd
Tel: (02) 9257 5472
Guild Insurance LtdTel: 1800 810 213
www.guildifs.com.au
Hallmark General Insurance Co LtdTel: (02) 9324 7999
www.ge.com.au
Hannover Reinsurance Tel: (02) 9274 3000
www.hannover-re.com
HBF Insurance Pty LtdTel: (08) 9265 6111 or 133 423
www.hbf.com.au
Hollard Insurance Co Pty Ltd (The)Tel: 1300 360 190
www.hollard.com.au
Hotline Insurance Co Pty LtdTel: (07) 3377 8801 or 1800 095 000
www.budgetdirect.com.au
HSB Engineering Insurance Ltd Tel: 1300 739 472
www.hsbaustralia.com
IAG Re LtdTel: (02) 9292 9222
www.iag.com.au
Registered general insurers
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Insurance Australia LtdTel: (02) 9292 9222
www.iag.com.au
Insurance Manufacturers of Australia Pty LtdTel: (02) 9292 9222
www.nrma.com.au / www.racv.com.au
Kemper Insurance Co Ltd
95 Harrington St, Sydney 2000
LawCover Insurance Pty LtdTel: (02) 9264 8855
www.lawcover.com.au
Liberty Mutual Insurance Co (Trading as Liberty Internaional Underwriters)Tel: (02) 8298 5800
www.liuaustralia.com.au
Lionheart Insurance Pty Ltd
Tel: (08) 9389 0094
Lumley General Insurance LtdTel: (02) 9248 1111
www.lumley.com.au
Master Butchers Co-operative Ltd
Tel: (08) 8262 5433
MDA National Insurance Pty LtdTel: (02) 9023 3300
www.mdanational.com.au
MDU Australia Insurance Co Pty LtdTel: (02) 9260 9000
www.unitedmp.com.au
Medical Insurance Australia Pty LtdTel: (08) 8238 4444
www.miga.com.au
Mercantile and General Reinsurance Co of Australia Ltd (The)
Tel: (02) 8295 9500
Mercantile Mutual Insurance(Australia) LtdTel: (02) 9234 8111
www.ing.com.au
Metlife Insurance LtdTel: 1300 555 625
www.metlife.com.au
Metway Insurance Ltd (07) 3362 1222
www.suncorp.com.au
MIPS Insurance Pty Ltd (Formerly Health Professionals Insurance Australia Pty Ltd)Tel (03) 8620 8828
www.mips.com.au
MMIA Pty Ltd
Tel: (02) 9955 3999
Mortgage Insurance Co Pty Ltd (The)Tel: (02) 9255 4100
www.allco.com.au
Mortgage Risk Management Pty Ltd(07) 4153 7714
www.widebaycap.com.au
MTA Insurance Ltd(Formerly MTQ Insurance Ltd)
Tel: (07) 3392 136
Mutual Community General Insurance Pty LtdTel: (03) 9601 8222
www.cgu.com.au/mcgi
Munich Reinsurance Company Australia BranchTel: (02) 9272 8000
www.munichre.com
Munich Reinsurance Co of Australasia LtdTel: (02) 9272 8000
www.munichre.com
Municipal Mutual Insurance Ltd
Tel: (03) 9642 3511
New India Assurance Co Ltd (The)
Tel: (02) 9241 3388
NipponKoa Insurance Co Ltd Tel: (02) 8224 4194
www.nipponkoa.co.jp/english
North Insurances Pty LtdTel: (03) 9283 3333
www.reotinito.com
NRG London Reinsurance Co Ltd
Tel: (02) 9274 3000
NRG Victory Australia Ltd
Tel: (02) 9274 3000
NZI Insurance Australia Ltd (as part of CGU Insurance Australia Ltd)Tel: (03) 9601 8222
www.cgu.com.au
Optus Insurance Services Pty LtdTel: (03) 9233 4000
www.optus.com.au
Permanent LMI Pty LtdTel: (02) 9231 7777
www.pmigroup.com.au
PMI Indemnity Ltd Tel: (02) 9231 7777
www.pmigroup.com.au
PMI Mortgage Insurance LtdTel: (02) 9231 7777
www.pmigroup.com.au
Registered general insurers
186
Poseidon Insurance Company Pty Ltd
4 Bligh Street, Sydney 2000
Professional Indemnity Insurance Co Australia Pty LtdTel: (03) 9347 3900
www.mdav.org
Professional Insurance Australia Pty Ltd
Level 3, 33 Lincoln SQ S, Carlton 3053
QBE Insurance (Australia)Tel: (02) 9375 4444
www.qbe.com
QBE Insurance (International) Tel: (02) 9375 4444
www.qbe.com
RAA Insurance LtdTel: (08) 8202 4600
www.raa.net
RAC Insurance Pty LtdTel: (08) 9421 4444
www.rac.com.au
RACT Insurance Pty LtdTel: (03) 6232 6300
www.ract.com.au
RACQ Insurance LtdTel: 13 19 05
www.racq.com.au
SCOR Reinsurance Asia Pacific Pte LtdTel: (02) 9274 3000
www.scor.com
Sphere Drake Insurance Ltd
(02) 9299 9900
St Andrew’s Insurance (Australia) Pty Ltd1300 363 159
www.standrewsaus.com.au
Statecover Mutual Ltd(02) 8270 6000
www.statecover.com.au
St Paul Travelers Insurance Company LtdTel: (02) 9256 8600
www.stpaulinternational.com
Stewart Title Ltd(02) 9081 6200
www.stewart.com
Sunstate Lenders Mortgage Insurance Pty Ltd(07) 3362 1222
www.suncorp.com.au
Sompo Japan Insurance Inc (02) 9390 6273
www.sompo-japan.com/english
Sunderland Marine Mutual Insurance Co Ltd (03) 9650 6288
www.smmi.co.uk
Swann Insurance (Australia) Pty Ltd (03) 9279 5000
www.cgu.com.au/swann
Swiss Re Australia Ltd (02) 8295 9500
www.swissre.com
Swiss Reinsurance Co (02) 8295 9500
www.swissre.com
Taxi Insurance Co-operative Ltd
Tel: (08) 9321 6423
TGI Australia Ltd^
Tel: (02) 9257 6687
Tokio Marine & Nichido Fire Insurance Co Ltd (The)
(02) 9232 2833
Tower Insurance Ltd (02) 9448 9000
www.toweraustralia.com.au
Transatlantic Reinsurance Co(02) 9274 3000
www.transre.com
Vero Insurance LtdTel: 13 18 13
www.vero.com.au
Vero Lenders Mortgage Insurance Ltd Tel: 13 18 13
www.promina.com.au
Virginia Surety Company INCTel: (03) 9211 3000
www.aon.com
Wesfarmers Federation Insurance Ltd Tel: (08) 9273 5333
www.wfi.com.au
Western Lenders Mortgage Insurance Co LtdTel: (02) 8235 0500
www.hbosaustralia.com.au
Westpac General Insurance LtdTel: 1300 650 255
www.westpac.com.au
Westpac Lenders Mortgage Insurance LtdTel: (02) 9260 7379
www.westpac.com.au
XL Insurance Co Ltd Tel: (02) 8270 1400
www.xlinsurance.com
Registered general insurers
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XL Re Ltd Tel: (02) 8270 1700
www.xlre.com
Zurich Australian Insurance Ltd Tel: (02) 9995 1111
www.zurich.com.au
Authorised non-operating holding companies
ACE Australia Holdings Pty LtdTel: (02) 9335 3200
www.aceinsurance.com.au
Allianz Australia LtdTel: 13 10 00
www.allianz.com.au
AMP LtdTel: (02) 9257 5000
www.amp.com.au
Asset Insure Holdings Pty LtdTel: (02) 9251 8055
www.assetinsure.com.au
Genworth Financial Mortgage Insurance Holdings Pty Ltd (formerly GE mortgage)Tel: (02) 9247 8677
www.genworth.com.au
HBOS Australia Pty LtdTel: (02) 8235 0500
www.hbosaustralia.com.au
Insurance Australia Group LtdTel: (02) 9292 9222
www.iag.com.au
Lumley Corporation Pty LtdTel: (02) 9248 1111
www.lumley.com.au
PMI Mortgage Insurance Australia (Holdings) Pty LtdTel: (02) 9231 7777
www.pmigroup.com.au
Promina Group LtdTel: (02) 9978 9000
www.promina.com.au
QBE Insurance Group LtdTel: (02) 9375 4444
www.qbe.com
Zurich Financial Services Australia LtdTel: (02) 9995 1111
www.zurich.com.au
Registered general insurers
188
American International Assurance Co (Australia) Ltd Tel: 1800 333 613
www.aiaa.com.au
AMP Life Ltd Tel: (02) 9257 5000
www.amp.com.au
ANZ Life Assurance Co LtdTel: (02) 9234 8111
www.anz.com.au / www.ing.com.au
Asteron Life LtdTel: (02) 8275 3500
www.asteron.com.au
BT Life LtdTel: 13 21 35
www.btonline.com.au
Challenger Life No 2 LtdTel: (02) 9994 7000
www.challenger.com.au
Colonial Mutual Life Assurance Society Ltd (The)Tel: (02) 8484 4817
www.comminsure.com.au
Combined Life Insurance Co of Australia LtdTel: (02) 9922 2096
www.combined.com
Commonwealth Insurance Holdings LtdTel: (02) 8484 4817
www.comminsure.com.au
Cuna Mutual Life Australia LtdTel: (02) 9295 5555
www.cunamutual.com.au
General Reinsurance Life Australia Ltd Tel: (02) 8236 6100
www.genre.com
Gerling Global Life Reinsurance Co of Australia Pty LtdTel: (02) 8274 4200
www.gerling.com
Hallmark Life Insurance Co LtdTel: (02) 9251 3155
www.ge.com.au
Hannover Life Re of Australasia LtdTel: (02) 9251 6911
www.hannoverlifere.com.au
HCF Life Insurance Co Pty LtdTel: 13 13 34
www.hcf.com.au
ING Life Ltd Tel: (02) 9234 8111
www.ing.com.au
IOOF Life LtdTel: 13 13 69
www.ioof.com.au
Macquarie Life LtdTel: (02) 8232 3333
www.macquarie.com.au
MBF Life LtdTel: (02) 9323 9500
www.mbf.com.au
Metlife Insurance LtdTel: 1300 555 625
www.metlife.com.au
MLC Ltd Tel: (02) 9957 8000
www.mlc.com.au
MLC Lifetime Co Ltd Tel: (02) 9957 8000
www.mlc.com.au
Munich Reinsurance Co of Australasia Ltd Tel: (02) 9272 8000
www.munichre.com
National Australia Financial Management LtdTel: (02) 9957 8000
www.national.com.au
National Mutual Life Association of Australasia Ltd (trading as AXA) Tel: (03) 9616 3911
www.axa.com.au
Norwich Union Life Australia Ltd (Trading as Aviva) Tel: (03) 9829 8989
www.avivagroup.com.au
NULife Insurance Ltd (Trading as Aviva)Tel: (03) 9829 8989
www.avivagroup.com.au
PrefSure Life Ltd
Prefsure was acquired by Tower 31/3/06
RACV Financial Services Ltd (Acquired by St Andrews Australia Ltd)Tel: 1800 630 705
www.standrewsaus.com.au
RGA Reinsurance Co of Australia LtdTel: (02) 8264 5800
www.rgare.com
St Andrews Life Insurance Pty LtdTel: 1300 363 159
www.standrewsaus.com.au
7.5 Registered life insurers
189
7Insurance directory
St George Life LtdTel: (02) 9236 1111
www.stgeorge.com.au
Suncorp Life & Superannuation Ltd Tel: (07) 3362 1222
www.suncorp.com.au
Swiss Re Life & Health Australia LtdTel: (02) 8295 9500
www.swissre.com
Tower Australia Ltd Tel: (02) 9448 9000
www.toweraustralia.com.au
Westpac Life Insurance Services LtdTel: (02) 9259 9374
www.westpac.com.au
Zurich Australia Ltd Tel: 132 687
www.zurich.com.au
Registered life insurers
190
ACA Health Benefits Fund (R)Tel: (02) 9847 3390
www.acahealth.com.au
Acorn PrudentialTel: (02) 9267 9141
www.druidsnsw.com.au
AMA Health Fund Ltd (R) (trading as Doctors Health Fund )Tel: (02) 9438 2022
www.amadoctorshealth.com.au
Australian Health Management Group LtdTel: 134 246
www.ahm.com.au
Australian Unity Health Ltd Tel: 13 29 39
www.australianunity.com.au
BUPA Australia Health Pty Ltd (trading as HBA & Mutual Community) Tel: 131 243
www.hba.com.au
CBHS Friendly Society Ltd (R) Tel: 1300 654 123
www.cbhs.com.au
Cessnock District Health Benefits Fund LtdTel: (02) 4990 1385
www.cdhbf.com.au
Credicare Health Fund LtdTel: 13 32 82
www.cua.com.au
Defence Health Ltd (R) Tel: (03) 9291 1000
www.defencehealth.com.au
Federation Health Ltd Tel: 1300 362 144
www.latrobehealth.com.au
GMHBA LtdTel: 1300 362 144
www.gmhba.com.au
Goldfields Medical Fund IncTel: 1300 653 099
www.gmfhealth.com.au
HBF Health Funds Inc Tel: 13 34 23
www.hbf.com.au
Health Care Insurance Ltd (R)Tel: 1800 804 950
www.hciltd.com.au
Health Insurance Fund of Western Australia IncTel: 1300 134 060
www.hif.com.au
Health-Partners IncTel: 1300 133 133
www.healthpartners.com.au
Hospitals Contribution Fund of Australia Ltd (The) Tel: 13 13 34
www.hcf.com.au
Latrobe Health Services IncTel: 1300 362 144
www.latrobehealth.com.au
Lysaght Peoplecare Ltd (R)Tel: (02) 4224 4333
www.peoplecare.com.au
Manchester Unity Australia Ltd Tel: 13 13 72
www.manchesterunity.com.au
MBF Australia Ltd Tel: (02) 9323 9500
www.mbf.com.au
MBF Alliances Pty Ltd Tel: (02) 9323 9500
www.mbf.com.au
Medibank Private Ltd Tel: 13 23 31
www.medibank.com.au
Mildura District Hospital Fund Ltd
Tel: (03) 5023 0269
Navy Health Ltd (R)
Tel: (03) 9896 9300
NIB Health Funds Ltd Tel: (02) 4926 9601
www.nib.com.au
Phoenix Health Fund Ltd (R)Tel: (02) 4935 5738 or 1800 028 817
www.phoenixhealthfund.com.au
Queensland Country Health LtdTel: 1800 813 415
www.qccu.com.au
Queensland Teachers’ UnionHealth Fund Ltd (R)Tel: (07) 3259 5821
www.tuh.com.au
Rail & Transport Health Fund Ltd (R)Tel: 1300 886 123
www.rthealthfund.com.au
7.6 Registered health insurers
191
7Insurance directory
Reserve Bank Health Society Ltd (R)
Tel: (02) 9551 9035
South Australian Police Employees Health Fund Inc (R)Tel: (08) 8212 2770
www.policehealth.com.au
St.Lukes HealthTel: 1300 651 988
www.stlukes.com.au
Teachers’ Federation Health Ltd (R) Tel: 1300 728 188
www.teachershealth.com.au
Teachers Union HealthTel: (07) 3259 5821
www.tuh.com.au
Transport Health Pty Ltd (R)Tel: (03) 8420 1888
www.transporthealth.com.au
United Ancient Order of Druids Friendly Society LtdTel: (03) 9329 5144
www.druids.com.au
Westfund Ltd
Tel: (02) 6353 1399
Registered health insurers
192
ACT Insurance Authority Type: SelfTel: (02) 6207 0184http://www.treasury.act.gov.au/actia/
Group: ACT Govt
Australian Reinsurance Pool Corporation Type: ReinsurerTel: (02) 8223 6777www.arpc.gov.au
Group: Cwlth Govt
ComcareType: SelfTel: 1300 366 979www.comcare.gov.au
Group: Cwlth Govt
Comcover Member Services Type: SelfTel: (02) 6215 2222www.comcover.com.au
Group: Cwlth Govt
Defence Service Homes Insurance Scheme Type: SelfTel: 1300 552 662www.dsh.gov.au
Group: Cwlth Govt
Export Finance & Insurance Corporation Type: ExportTel: (02) 9201 2111www.efic.gov.au
Group: Cwlth Govt
Insurance Commission of WA Type: CTP / SelfTel: (08) 9264 3333www.icwa.wa.gov.au
Group: WA Govt
Motor Accident Commission (SA) Type: CTPTel: (08) 8221 6377www.mac.sa.gov.au
Group: SA Govt
Motor Accidents Insurance Board (Tas) Type: CTPTel: (03) 6336 4800www.maib.tas.gov.au
Group: Tas Govt
NSW Self Insurance Corporation (Formerly NSW Insurance Ministerial Corporation)Type: SelfTel: (02) 9228 3829
Group: NSW Govt
NSW WorkCover Authority Type: WorkersTel: (02) 4321 5000www.workcover.nsw.gov.au
Group: NSW Govt
South Australian Government Captive Insurance Corporation (SAICORP) Type: SelfTel: (08) 8226 9500www.treasury.sa.gov.au/saicorp
Group: SA Govt
Territory Insurance Office (NT) Type: GeneralTel: 1300 301 833www.tiofi.com.au
Group: NT Govt
Transport Accident Commission (Vic) Type: CTPTel: 1300 654 329www.tac.vic.gov.au
Group: Vic Govt
Victorian Managed Insurance AuthorityType: SelfTel: (03) 9270 6900www.vmia.vic.gov.au
Group: Vic Govt
Victorian WorkCover Authority Type: WorkersTel: (03) 9641 1444www.workcover.vic.gov.au
Group: Vic Govt
WorkCover Corporation (SA) Type: WorkersTel: 13 18 55www.workcover.com
Group: SA Govt
WorkCover Queensland Type: WorkersTel: 1300 362 128www.workcover.qld.gov.au
Group: Qld Govt
7.7 Government insurers
193
7Insurance directory
Australian Insurance LeaderKim Smith
SYDNEY201 Sussex Street Tel: (02) 8266 0000 Fax: (02) 8266 9999
AssuranceBilly Bennett David Prothero Ian Hammond Julian Williams Leigh Minehan Pat Murray Peter Merrett Richard Deutsch Scott Fergusson Scott Hadfield Voula Papageorgiou
ActuarialChris Latham Christa Marjoribanks Conor O’Dowd Daniel Tess Jason Slade John Walsh Lisa Simpson Michael Playford Noeline Woof Tim Jenkins
Corporate Finance and RecoveryIan Clark Martin Brown
Transaction ServicesCharles Humphrey Sean Gregory Tom Fenton
Risk ManagementCassandra Michie Jan Muysken Nigel Ampherlaw Richard Mirabello Robin Low
TaxBrian Lawrence John Masters Ken Woo Manuel Makas Neil Wilson Peter Kennedy
MELBOURNE2 Southbank Boulevard Tel: (03) 8603 1000 Fax: (03) 8613 5555
AssuranceDale McKee David Coogan Galina Kraeva Greg Braddy Simon Gray
Corporate Finance and RecoveryGreg Keys James Garde
Risk ManagementMark Ridley Mike Bridge
TaxGabriel Szondy Jeff May Mark Laurie
BRISBANE1 Eagle Street Tel: (07) 3257 5000 Fax: (07) 3257 5999
AssuranceAndrew Weeden Tim Allman
7.8 PwC Australian offices and industry experts
194
PERTH250 St George’s Terrace Tel: (08) 9238 3000 Fax: (08) 9238 3999
AssuranceNick Henry
ActuarialPeter Lurie
ADELAIDE91 King William Street Tel: (08) 8218 7000 Fax: (08) 8218 7999
AssuranceDerek Clark
TaxJim McMillan
www.pwc.com/au