Bills Digest No. 21 2001-02
General Insurance Reform Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
General Insurance Reform Bill
2001
Date Introduced: 28 July 2001
House: House of Representatives
Portfolio: Treasury
Commencement: The substantive amendments
proposed by the Bill to the Insurance Act 1973 are taken
to have commenced on 1 July 2002. The transitional provisions
contained in Schedule 2 of the Bill commence on Royal
Assent.
The major
amendments proposed by the Bill:
- provide the Australian Prudential Regulation Authority (APRA)
with power to make, vary and revoke prudential standards
- expand the coverage of the Insurance Act 1973 to
include the non-operating holding companies (NOHC) of a general
insurer, and the subsidiaries of a general insurer and NOHC
- expand the obligations on auditors and actuaries to report to
APRA, in particular to require auditors and actuaries to inform
APRA where he/she has reasonable grounds for believing certain
matters have occurred including that the insurer, NOHC or a
subsidiary is insolvent, or there is a significant risk that it
will become insolvent
- require general insurers to appoint APRA approved auditors and
actuaries, and
- provide APRA with power to remove certain directors and senior
managers of insurers and their subsidiaries where satisfied the
person is a disqualified person, or does not meet one or more of
the criteria for fitness and propriety set out in the prudential
standards.
What is insurance
The principal function of insurance can be said
to be to
provide financial protection against the
consequences of events, the occurrence of which is generally
adverse to the interests of the person effecting the insurance (the
insured), although events which mature life insurance policies are
not always adverse. This is achieved by risk transference and
distribution. By effecting insurance, insureds transfer the risk of
economic loss to insurers, who in turn redistribute the risk
through investment and reinsurance arrangements. Thus the adverse
effect of economic losses is minimised by distributing the
risk.(1)
The Federal Court of Australia considered what
constitutes insurance in Australian Health Insurance
Association Limited v Esso Australia
Limited.(2) In its majority judgement the Court
held that the word insurance must be taken by its defined meaning
and:
- The essence of the relationship between insurer and insured is
the relationship of indemnity in the context of contingent loss. If
a contract has the hallmarks of an insurance contract, the contract
will be one of insurance
- Proportionality of the premium to the risk undertaken may help
to distinguish the concept of insurance from other concepts but it
is not an indispensable element. All that is necessary is the
undertaking by the insurer for good consideration, and
- The absence of profit from an activity does not disqualify that
activity as a business; nor the fact that the activity is carried
on as part of a much broader activity.(3)
Insurance is classified in a number of ways.
Most commonly insurance is classified by way of the event insured
against, for example, into categories of life, fire, marine and
accident. A broader classification, and one which is reflected in
legislative regimes, is to distinguish indemnity insurance from
contingency insurance. Under indemnity insurance, the insurer
agrees to indemnify the insured on the latter having a loss. All
contracts of insurance are indemnity contracts, except for
contracts of life, sickness and personal accident insurance. The
latter come within the contingency classification whereby an agreed
sum is paid when the event insured against, for example death,
occurs. This division between non-life (general insurance) and life
insurance is the main distinction or category division in relation
to the regulation of the Australian insurance industry.
The Constitution provides the Australian
Parliament with the power to pass laws with respect to certain
specified areas. Insurance is specifically dealt by section 51(xiv)
of the Constitution, which provides that:
The Parliament shall, subject to the
Constitution, have power to make laws for the peace, order and good
government of the Commonwealth with respect to
...
Insurance, other than State insurance; also
State insurance extending beyond the limits of the State
concerned.
While the Commonwealth's Life Insurance Act
1995 is applicable to State insurance which goes beyond the
limits of the relevant State concerned, the Insurance Act
1973 does not. The Australian Parliament has not elected to
date to exercise its power over State insurance extending beyond
the limits of the relevant State concerned. While there is only
limited High Court opinion on the meaning of section
51(xiv)(4), it is clear that section 51(xiv) empowers
the Australian Parliament to legislate in respect to all aspects of
insurance (including the conditions upon which any person or
corporation may carry on insurance business of any kind and to
establish mechanisms for the day to day supervision of such persons
and corporations and to regulate their financial affairs), other
than State insurance.
Australian statutory regulation
The conduct of the Australian insurance industry
is regulated by both Federal and State legislation.(5)
The applicable laws apply to insurers only if they carry on
insurance business. While life insurance is regulated by the
Life Insurance Act 1995, most non-life or general
insurance is regulated by the Insurance Act 1973.
The responsibility for overseeing the regulatory
system and monitoring the activities of insurance companies which
issue general and life insurance policies is statutorily vested
with APRA.
An insurer may carry on general insurance
business in Australia only if authorised to do so under the
Insurance Act 1973. Section 3(1) of the Insurance Act
1973 defines an insurance business to mean:
the business of undertaking liability, by way of
insurance (including reinsurance), in respect of any loss or
damage, including liability to pay damages or compensation
contingent upon the happening of a specified event, and includes
any business incidental to insurance business as so defined,
The Insurance Act 1973 does not apply
to certain forms of insurance business, including:
- life insurance business
- accident insurance business undertaken solely in connection
with life insurance business
- pecuniary loss business carried on solely in the course of
banking business
- benefits provided by friendly societies, trade unions and
employee associations for their members and their members'
dependants
- employer and employee provided superannuation, pension,
retirement, disability and death benefits
- funeral benefits
- business undertaken by carrier, carriers' agents, forwarding
agents, warehouseman and shipping agents in respect to other
people's goods which are within their control for the purposes of
carriage, storage or sale
- business undertaken by innkeepers and lodging-house keepers in
respect of goods deposited with them for safe custody or which a
guest hold for another person
- insurance of the property of a religious organisation, and
- health insurance provided by a registered
organisation.(6)
APRA may grant an authority to carry on general
insurance business under the Insurance Act 1973 if:
- an applicant's paid up share capital is at least $2
million
- where the applicant is incorporated in Australia, its assets
exceed its liabilities by at least $2 million
- the applicant's assets in Australia exceed its liabilities by
at least $2 million
- the applicant's arrangement for reinsurance have been approved
by APRA or it has been granted an exemption
- the applicant can and is likely to be able to continue to meet
its liabilities, and
- the applicant complies and is likely to be able to continue to
comply with the provisions of the Insurance Act
1973.(7)
Under section 51 of the Insurance Act
1973, APRA is accorded power to investigate and supervise the
affairs of an authorised insurer where it appears that the insurer
cannot or may not be able to meet its liabilities.
APRA or an appointed inspector is accorded
extensive powers under the Insurance Act 1973 to
investigate an authorised insurer. For example, APRA or an
inspector may:
- investigate another corporation that is or has been associated
with the insurer
- enter land or premises occupied by the insurer being
investigated to examine and take possession of papers relating to
its affairs
- compel a prescribed person to produce papers relating to the
affairs of the insurer being investigated, and which are in under
the person's custody or control, and to appear before APRA or the
inspector for examination concerning the matter being investigated,
and
- compel a prescribed person to give all reasonable assistance
concerning the matter being investigated.(8)
APRA may revoke an insurer's authority to carry
on general insurance either at the insurer's request where APRA is
satisfied that the insurer has no liabilities in respect of
insurance business in Australia, or the insurer has transferred all
interests in its insurance business in Australia to another
authorised insurer.(9) Additionally, APRA with the
Treasurer's approval, may revoke an insurer's authority if the
insurer does not start business to carry on insurance business in
Australia within 12 months of being authorised to do so, or has not
carried on insurance business in Australia during the last 12
months and has no liabilities in respect of such
business.(10)
The Insurance Act 1973 imposes a number
of conditions on authorised insurers, including
- a requirement to maintain solvency margins
- if an insurer has a share capital, maintain its paid up share
capital at no less than $2 million
- comply with any conditions that APRA or the Treasurer imposes
on its authority, and
- where the corporation is incorporated in Australia, a condition
that:
- the value of its assets at all times exceed the amount of its
liabilities by not less than $2 million, or
- 20% of its premium income during its last preceding financial
year, or
- 15% of its outstanding claims provision as at the end of its
last preceding financial year
whichever is the greatest.(11)
Key industry data
For the December Quarter 2000:
- Total private sector general insurers assets increased to $63.1
billion by the end of December 2000, representing an increase of
1.7% during the quarter, or 7.7% over the previous year.
- Private sector general insurers premium revenue (less
reinsurance expense) was $3.8 billion for the December 2000
quarter, up 4.1% on the September 2000 quarter. Premium revenue for
the year to December 2000 amounted to $14.6 billion, up 1.8% (or
$258 million) on the previous year.
- Private sector general insurers claims expense (less
reinsurance and other recoveries revenue) were $2.8 billion for the
December 2000 quarter, down 10.6% on the September 2000 quarter.
Claims expense for the year to December 2000 amounted to $12.2
billion, down 8.3% (or $1.1 billion) on the previous year.
- Net premium flows (that is, premium revenue less claims
expense) for the year to December 2000 were $2.4 billion, up 127.8%
(or $1.4 billion ) on the previous 12 months.
- The underwriting result (that is, premium revenue less claims
and underwriting expenses) for the year to December 2000 was
minimum $1.6 billion, a 42.3% (or $1.2 billion) improvement on the
previous 12 months.(12)
Industry reaction
The peak insurance industry body, the Insurance
Council of Australia (ICA), established a major working party in
1999 as part of the Federal Government's review of the
Insurance Act 1973.(13)
The ICA maintains that it has consistently
supported changes to the prudential regulatory regime through a
review of the Insurance Act 1973 which has been conducted
over the last two/three years.(14) In May 2001 the ICA
responded to Treasury's Discussion Paper regarding the Insurance
Act Amendment Bill 2001. Key recommendations in the ICA's response
included:
Recommendation - Division 3 - Revocation of
Authority
In relation to breaches of legislation including
failure to pay levies and the like, although it is recognised that
an ultimate sanction of revocation of authority will be required,
we would have thought that this is better dealt with through other
explicit penalty provisions.
We strongly support the introduction into
legislation of provisions which would allow the transfer of
portfolios of business both in anticipation of the handing in of an
authority or for other business purposes. This would greatly
simplify the disposition and acquisition of insurance businesses in
Australia.
Care needs to be taken in drafting any provision
requiring notification to policyholders to properly allow for
issues relating to the identification of those persons and the
location of them.
We generally believe that any power to grant
relief from the application of any part of the Act should also be
exercised having regard to competition policies so that a
particular company should not, by operation of this provision, be
able to obtain a competitive advantage.
Recommendation - Section 7 APRA may determine
that provision of the Act do not apply
The power to grant relief from the operation of
the provisions of the Act should not be permitted to be exercised
where it is likely to give a competitive advantage to the person
who benefits from the relief.
Recommendation - Part IIIA - Prudential
Supervision of Authorised General Insurers
We recommend that the general insurance advisory
panel should be given a statutory basis.
Recommendation - Division 2 - Part IV - APRA may
give directions to comply with Prudential Standards and Prudential
Regulations
We believe care needs to be taken in relation to
the power to give directions that the interests of third parties
are adequately protected.
Recommendation - Part IV - Auditors and
Actuaries
A proper balance between the responsibility of
the Board and the whistle blowing activities of an auditor and/or
actuary is met by requiring the auditor and/or valuation actuary to
report a matter to the Board which may involve a breach or a
potential beach of prudential requirements or where there is a
material risk to policy holders. The obligation to report to APRA
should then arise if, in the view of the reporting body, there is a
failure by the Board to take appropriate step.
Recommendation -Division 5 - Part IV-
Accounts
The situation that arises where an insurer
determines not to adopt the liability valuation standards, needs to
be clarified. There should be no inference of non-compliance rather
what should occur is the alternate standard needs to be reported to
APRA and the alternate standards needs to be fully disclosed in the
Financial Reports of the company.(15)
Government rationale for Bill
The Government through the Second Reading Speech
and Explanatory Memorandum to the Bill advances a number of
rationale for the amendments to the Insurance Act 1997,
including:
- to place Australia at the forefront of international best
practice(16)
- bring the general insurance regime into line with changes that
have already occurred in authorised deposit taking institutions and
life insurers in Australia(17)
- the current Insurance Act is widely perceived to be blunt and
unresponsive in the face of market development that have
transformed the financial sector over recent
years(18)
- to make it clear that the purpose of the Insurance Act is to
protect policy holders and other beneficiaries of general insurance
policies(19)
- to minimise compliance costs and restrictions on competition
where these cannot be justified on cost/benefit
grounds,(20) and
- to ensure that the general insurance regime is more consistent
with other supervisory regimes administered by
APRA.(21)
Media comment
Much of the media comment relating to the
introduction of this Bill has related to the collapse of HIH
Insurance Limited (HIH).(22)
For example, it is reported in The Canberra
Times of 10 August 2001 that up to 50 general insurers will be
swallowed up or forced to shut if they cannot meet tougher
standards for the general insurance industry after the HIH
collapse. The Minister for Financial Services, the Hon. Joe Hockey
is reported in the same articles as stating:
It was decided to bring forward these particular
amendments in response to APRA's dealing with HIH.
The General Insurance Reform Bills unabashedly
are going to reduce the number of general insurers in
Australia.
We are doing that because there are a number of
very small insurers that will find it very difficult to cope with
the new global environment for financial services.
The companies have until July 1, 2004, to merge
or be taken over if they cannot raise enough capital to operate
under the new regime.
The Chief Executive of APRA is reported in
The Financial Review of 29 June 2001 as stating that:
The new regime could have prevented HIH's
collapse by providing an earlier and clearer warning of the
company's financial problems.
The Australian managing director of Royal &
Sun Alliance Limited is reported in The Sydney Morning
Herald of 16 May 2001 as stating that:
Earlier implementation [of the amendments
proposed by this Bill and new prudential standards] might see a
shake-out among smaller players. ... On the basis of the new
capital standards, we already comply with those. If they are
bringing it forward we'll need to change our systems a little
earlier.
The Chief Executive of APRA is reported in
The Age of 15 May 2001 as stating that:
... the overhaul was designed to protect
policy-holders without imposing unnecessary costs and red tape on
insurers.
These proposals, when implemented, will give
Australia a much more effective supervisory system for general
insurers and will encourage an upgrading of the industry's risk
management and governance practices.
... under the old regulatory regime there was
also too much room for companies to choose their own approach in
valuing insurance liabilities, from very conservative to very
optimistic.
The Governor of the Reserve Bank, Ian
Macfarlane, is reported in the same article as stating:
... the authority [APRA] had been trying to push
the reforms through since mid-1999 but had faced considerable
opposition from the industry.
If there is one good thing that has come out of
HIH it is that the opposition has finally retreated and we are
going to see some actions pretty soon.
Object of Act
An object section (new section
2A) is inserted in the Insurance Act 1973 (the
Insurance Act) by item 1 of Schedule
1. The provision provides that the main object of the
Insurance Act is to protect the interests of policy holders and
prospective policy holders under insurance policies (issued by
general insurers and Lloyd's underwriters) consistent with the
continued development of a viable, competitive and innovative
insurance industry.
The new section also states how the main object
of the Insurance Act is to be achieved, namely:
- restricting who can carry on insurance business by requiring
general insurers, and the directors and senior management of
general insurers, to meet certain suitability requirements
- imposing primary responsibility for protecting policyholders on
directors and senior management of general insurers
- imposing on general insurers requirements to promote prudent
management of their insurance business, and
- providing for the prudential supervision of general insurers by
APRA.
Prudential matters
A new definition of "prudential matters" is
inserted in the Insurance Act by item 12 of
Schedule 1. A prudential matter, in relation to a
general insurer, authorised non-operating holding company (NOHC) or
a subsidiary of a general insurer or authorised NOHC is defined to
mean:
the conduct by the insurer, NOHC or subsidiary
of any of its affairs in such a way as:
- to keep itself in a sound financial position; or
- not to cause or promote instability in the Australian financial
system; or
the conduct by the insurer, NOHC or subsidiary
of any of its affairs with integrity, prudence and professional
skill.
Application of Insurance Act
A new subsection 5(2), dealing
with the application of the Insurance Act, is substituted in the
Insurance Act by item 20 of Schedule
1 of the Bill. New subsection 5(2)
provides that the Insurance Act does not apply to insurance
business carried on by:
- the Commonwealth and its territories
- a prescribed corporation, or
- a corporation, being an insurance business prescribed by the
regulations.
Power of APRA to determine provisions do
not apply
New sections 7 and
7A, dealing with determinations of APRA that
provisions of the Insurance Act do not apply, are inserted in the
Insurance Act by item 21 of Schedule
1 of the Bill. APRA is accorded power under new
section 7 to determine that all or specified provisions of
the Insurance Act do not apply to a person while the determination
is in force. A determination may apply to an individual or class of
persons, specify the period during which the determination is to
last and be made subject to specified conditions. Determinations
must be published in the Commonwealth Gazette.
Additionally, APRA may vary or revoke a determination through a
determination published in the Commonwealth Gazette.
It will be an offence, punishable by a maximum
fine of 60 penalty units ($6600) for an individual and 300 penalty
units for a corporation ($33 000), where a person does or
fails to do an act which results in a breach of a new
section 7 condition.
Authorisation to carry on insurance
business
A new Part III (new
sections 9-31), dealing with authorisation to carry on
insurance business, is substituted in the Insurance Act by
item 22 of Schedule 1.
New section 9 makes it an
offence for a person to carry on insurance business, punishable by
a maximum fine of 60 penalty units ($6,600), if the person is not a
corporation or a Lloyd's underwriter, and there is no section 7
APRA determination in force that this section does not apply.
[Note: New section 128A, which is inserted in the
Insurance Act by item 68 of Schedule
1, provides APRA with the option of giving a person
written notice of its belief that he/she has done an act or failed
to do an act in circumstances that give rise to an offence. The new
section makes the offence applicable from the day the notice is
received and for each subsequent day the breach continues. Thus,
the penalty will accrue for every day the offence continues.]
New section 10 makes it an
offence, punishable by a maximum fine of 300 penalty units
($33 000), for a corporation or Lloyd's underwriter to carry
on insurance business in Australia without authorisation and there
is no section 7 APRA determination in force that this section does
not apply.
New section 12 provides that a
corporation may apply to APRA for an authorisation to carry on
insurance business in Australia and grants APRA the power to
authorise an applicant to carry on such business. APRA may refuse
an application if the applicant is a subsidiary of a NOHC that is
not an authorised NOHC. A decision by APRA to refuse an
authorisation is subject to Administrative Appeals Tribunal review
under Part VI of the Insurance Act. [Note: A corporation that is
authorised under new section 12 is defined by
new section 11 to be general insurer.]
APRA is accorded power under new section
13 to impose certain conditions on any authorisation, or
vary or revoke conditions imposed on an insurer's authorisation.
Conditions must relate to prudential matters. Additionally, APRA
may make an authorisation conditional on a corporation, of which
the insurer is a subsidiary, being an authorised NOHC.
It will be an offence punishable by a maximum
fine of 300 penalty units ($33 000) under new section
14 for a general insurer to do or fail to do an act which
results in a breach of a new section 13 condition
unless there is a new section 7 APRA determination
in force that this section does not apply.
New section 15 deals with the
circumstances under which APRA may revoke a general
insurer's authorisation. The circumstances include:
- a failure to comply with a requirement of the Insurance
Act
- where it would be contrary to the national interest for the
authorisation to remain in force
- a failure to pay a statutory amount of levy, late penalty or
charge
- where the insurer is insolvent and is unlikely to return to
solvency within a reasonable period of time, or
- where the insurer has inadequate capital and is unlikely to
have adequate capital within a reasonable period of time.
Revocation under the circumstances specified in
new section 15 require the Treasurer's
approval.
APRA must revoke a general insurer's
authorisation if:
- the insurer asks APRA; and
- APRA is satisfied that the insurer has no liabilities in
respect of insurance business carried on by it in Australia, and
the revocation would not be contrary to the national interest
(new section 16).
APRA is accorded power under new section
17 to direct a general insurer to assign its liabilities
to one or more other general insurers where APRA considers that it
would revoke the general's insurer's authorisation under
new section 15 if the general insurer had no
liabilities in respect of its Australian insurance business.
Assignment of liabilities may include the
assignment of any rights or benefits in connection with contracts
of insurance.
New section 17 also allows a
general insurer who has asked APRA for a revocation to ask APRA to
approve an assignment of its insurance business liabilities. APRA
may only approve an assignment of a general insurer's liabilities
where satisfied of certain matters, including whether the
assignment is in:
- the national interest
- the interests of the insurer's policyholders, and
- any other matter APRA considers relevant.
APRA authorisation to be a NOHC
New sections 18-23 deal with
the authorisation of a company as a non-operating holding company
(NOHC). A corporation is a NOHC in relation to another corporation
(the first corporation) if the first corporation is a subsidiary of
the corporation and the corporation undertakes no business other
than the ownership or control of other corporations (item
9 of Schedule 1).
New section 18 provides that a
corporation may apply to APRA for authorisation to operate as an
NOHC and grants APRA the power to so authorise an applicant if it
considers it appropriate. An authorisation operates as an
authorisation in relation to the corporation and any general
insurers that are subsidiaries of the corporation. A decision by
APRA to refuse an NOHC authorisation is subject to Administrative
Appeals Tribunal review under Part V of the Insurance Act.
APRA is accorded power under new section
19 to impose certain conditions on any NOHC authorisation,
or vary or revoke conditions imposed on an insurer's authorisation.
Conditions must relate to prudential matters. Additionally, APRA
may make an authorisation conditional on a corporation, of which
the insurer is a subsidiary, being an authorised NOHC.
The effect of new sections
20-22 are substantially the same effect as new sections
14-17 (see above), except that they apply to NOHC
authorisations.
New section 23 allows APRA to
publish, at whichever time it thinks necessary, a list of
authorised NOHCs. Publication of the list can be in any form APRA
thinks appropriate.
Persons disqualified from acting as
general insurers
New section 24 is an offence
provision relating to disqualified persons. The term disqualified
person is defined by new section 25 to
include:
- a person convicted of an offence against or arising out of an
Australian or foreign law if that offence concerned dishonest
conduct or conduct relating to a financial sector company
- a person who has been or becomes bankrupt
- a person who has applied to take the benefit of a law for
relief of bankrupt or insolvent debtors, or
- a person who has compounded with his or her
creditors.(23)
Under new section 24 a
disqualified person must not be, or act as:
- a director or senior manager of a general insurer (other than a
foreign general insurer)
- a director or senior manager of an authorised NOHC, or
- a senior manager or agent of a foreign general insurer.
Where a disqualified person is, or acts in, one
of the above positions he/she will have committed a strict
liability offence attracting a maximum fine of 60 penalty units
($6,600 or $27,500 for a corporation) and also be subject to a
maximum term of imprisonment of two years. The offence attracting a
term of imprisonment is not one of strict liability.
Despite the effect of new section
25, APRA under new section 26 may
determine a person is not a disqualified person. APRA may do this
on its own initiative or on application of the disqualified person.
However, APRA may only make such a determination if it is satisfied
that the person is highly unlikely to be a prudential risk to any
general insurer or authorised NOHC. An APRA refusal of an
application to not be classed as a disqualified person is subject
to review by the AAT under Part VI of the Insurance Act.
New section 27 provides that
APRA may direct that a general insurer or authorised NOHC remove a
person who is:
- a director or senior manager of a general insurer (other than a
foreign general insurer)
- a director or senior manager of an authorised NOHC, or
- a senior manager or agent of a foreign general insurer.
where satisfied the person is a disqualified
person, or does not meet one or more of the criteria for fitness
and propriety set out in the prudential standards.
It will be an offence punishable by a maximum
fine of 200 penalty units ($22000) under new section
28 if:
- or general insurer does not hold assets in Australia (excluding
goodwill and any other amount excluded by the prudential standards)
equal to or more than the total amount of its liabilities in
Australia
- APRA has not authorised the insurer to hold assets of a lesser
value, and
- there is no APRA determination operating exempting a particular
insurer from the operation of this section.
Prudential supervision and
monitoring
APRA is given the power under new
section 32 to determine prudential standards. These
standards must be complied with by all general insurers, all
authorised NOHCs, the subsidiaries of general insurers or
authorised NOHCs, or a specified class of general insurers,
authorised NOHCs or subsidiaries of general insurers or authorised
NOHCs.
In making a prudential standard, APRA must have
regard to good commercial practice and the cost in complying with
the requirements of a standard.
An APRA determination of a prudential standard,
variation or revocation of a prudential standard, is a disallowable
instrument for the purposes of section 46A of the Acts
Interpretation Act 1901 and consequently subject to
disallowance by either house of the Australian Parliament.
New section 36 provides APRA
with the power to direct a general insurer, authorised NOHC or
subsidiary of a general insurer or authorised NOHC, where satisfied
they have breached a prudential standard, or are likely to, to
comply with all or a part of the standard within a specified time.
A direction must be complied with despite anything in a
corporations constitution or any contract or arrangement to which
it is a party.
Failure to comply with a new section
36 direction will constitute an offence punishable by a
maximum fine of 60 penalty units ($6,600) (New section
37).
APRA is accorded the specific monitoring
functions by new section 38 of:
- collecting and analysing information on prudential matters
concerning general insurers, authorised NOHCs and the subsidiaries
of general insurers and authorised NOHCs
- encouraging and promoting the carrying out of sound practices
in relation to prudential matters by general insurers, authorised
NOHCs and the subsidiaries of general insurers and authorised
NOHCs, and
- evaluating the effectiveness and carrying out of those
practices.
Rules affecting auditors and actuaries
of insurers
New sections 39-49Q, dealing
with role of auditors and actuaries in relation to insurers, are
inserted in the Insurance Act by item 23 of
Schedule 1. The key requirements imposed on
insurers, auditors and actuaries by the new sections include:
- a general insurer must have an APRA approved auditor and
actuary (new section 39);
- APRA can only approve an appointment as a general insurer's
auditor or actuary if satisfied that the person meets the
eligibility criteria set out in the prudential standards and there
is no determination current disqualifying the person from holding
the appointment (new section 40) [Note: An APRA
refusal to approve a person's appointment is subject to review by
the Administrative Appeals Tribunal under Part VI of the Insurance
Act]
- auditors and actuaries must comply with the prudential
standards when performing his/her duties or exercising his/her
powers (new section 41)
- APRA may revoke an approval of an appointment as an auditor or
actuary where satisfied the person has failed to perform adequately
and properly the functions and duties of the appointment under the
Insurance Act or the prudential standards, or does not meet one or
more of the criteria for fitness and propriety set out in the
prudential standards (new section 42) [Note: An
APRA refusal to approve a person's appointment is subject to review
by the Administrative Appeals Tribunal under Part VI of the
Insurance Act]
- APRA may determine that a person is disqualified from holding
any appointment as an auditor or actuary of a general insurer where
it determines he/she has failed to perform adequately and properly
the functions and duties of such an appointment under the Insurance
Act or the prudential standards, or does not meet one or more of
the criteria for fitness and propriety set out in the prudential
standards (new section 44) [Note: A
disqualification is subject to review by the Administrative Appeals
Tribunal under Part VI of the Insurance Act]
- APRA may determine that one or more general insurers are exempt
from the requirement to appoint an actuary (new section
47)
- where directed to by APRA, require a person who is or was an
auditory or actuary of a general insurer, authorised NOHC, or a
subsidiary of a general insurer or authorised NOHC, is to provide
information on matters relating to those bodies where APRA
considers that the information will assist it in performing its
functions under the Insurance Act (new section
49). [Note: Failure to provide information will constitute
an offence punishable by a maximum fine of 100 penalty units
($11 100) or a maximum term of imprisonment of 6 months, or
both. Additionally, a failure to provide information will
constitute a strict liability offence attracting a maximum fine of
60 penalty units ($6600)]
- an approved auditor or actuary must inform APRA where he/she
has reasonable grounds for believing that:
- the insurer, NOHC or subsidiary is insolvent, or there is a
significant risk that it will become insolvent
- the insurer, NOHC or subsidiary has failed to comply with the
prudential standards or a condition of its authorisation
- the insurer, NOHC or subsidiary has failed to comply with a
requirement or direction under the Insurance Act or Financial
Sector (Collection of Data) Act 2001, and
- an existing or proposed state of affairs may materially
prejudice the interests of the insurer's policy holders, or the
policyholders of any general insurer who is a subsidiary of an NOHC
[Note; Failure to provide information will constitute an offence
punishable by a maximum fine of 100 penalty units ($11 100) or
a maximum term of imprisonment of 6 months, or both. Additionally,
a failure to provide information will constitute a strict liability
offence attracting a maximum fine of 60 penalty units ($6600)]
(new section 49A).
- an auditor or actuary who provides information to APRA in good
faith and without negligence will not be subject to any action,
claim, demand, or liability to any other person in respect to that
information (new section 49C)
- that APRA can require a general insurer to appoint an
independent actuary to investigate all or part of the insurer's
liabilities and produce a written report (new section
49E)
- will specify that the role of an auditor appointed under
new section 39 by a general insurer be to audit
the insurer's yearly statutory accounts, perform the functions of
an auditor set out in the prudential standards and prepare any
reports required by the prudential standards (new section
49J), and
- subject to the Treasurer's approval, that APRA can direct a
general insurer to provide, or further provide, its accounts a
specified amount, or an amount determined in a specified way, in
respect of its liabilities (new section 49M)
[Note: It will be an offence punishable by a maximum fine of 60
penalty units ($6,600) for a general insurer to breach a section
49M direction].
Where it appears to APRA that an authorised
insurer is or is likely to become unable to meet its liabilities it
may, under subsection 51(1) of the Insurance Act:
- direct the insurer to provide, within a specified period of not
less than seven days, any information about its affairs as APRA
specifies (paragraph 51(1)(a))
- direct the insurer, with the Treasurer's approval, not to
dispose of or otherwise deal with or remove from Australia, during
a specified period not greater than six months, any asset in
Australia which APRA specifies (paragraph 51(1)(b)), or
- direct the insurer, with the Treasurer's approval, to deal with
any asset, or any specified asset, of the corporation on the terms
and conditions specified in the notice (paragraph 51(1)(b)).
The scope of APRA's powers under section 51 of
the Insurance Act are extended by items
30 and 31 of Schedule
1 to authorised NOHCs and situations where a general
insurer or authorised NOHC has contravened or failed to comply with
a provision of the Insurance Act or a condition or direction
applicable under the Insurance Act.
A new section 128A is inserted
in the Insurance Act by item 68 of
Schedule 1 of the Bill and provides APRA with the
power to give a person written notice that it believes he/she has
done an act or failed to do an act in circumstances that gave rise
to an offence under new sections 7A, 9, 10, 14, 20, 28, 37 or 49P.
The effect of such a notice is that the alleged breach will be
taken to have been a breach from the day the notice is received and
for each subsequent day the breach continues.
Transitional provisions
The effect of item 3 of
Schedule 2 of the Bill is to allow general
insurers and APRA to appoint and approve auditors and actuaries
prior to the commencement of this Bill. Item 3
allows for such appointments and approval to take place from Royal
Assent. An appointment or approval given before the commencement of
this Bill will be taken to have effect on the day specified by
APRA. That day must not be before the commencement of the Bill.
APRA is accorded power by item
4 of Schedule 2 to determine that all or
specified provisions of the existing Insurance Act continue to
apply to a person or class of persons for a specified period during
the transition period (ie. the period starting on the commencement
and ending 2 years after the commencement).
APRA is accorded power by item
5 of Schedule 2 to determine that all or
specified provisions of the Insurance Act as amended by this Bill
do not apply to a person or class of persons for a specified period
during the transition period.
Item 10 of Schedule
2 provides APRA with power during the transition period to
give directions to persons to whom some or all of the existing
Insurance Act applies, or to person to whom some or all of the
Insurance Act as amended by this Bill applies.
The most important reform to the current regime
proposed by the Bill is the grant to APRA of power to make, vary
and revoke prudential standards. These standards will be
subordinate to the Insurance Act 1973 and disallowable
instruments. [Core regulatory powers under the current Insurance
Act are outlined in the Background to this Digest] As such, the
prudential standards will be subject to disallowance by the
Australian Parliament.
The Government has indicated that it is proposed
that there will be four prudential standards on liability
valuation, capital adequacy, reinsurance arrangements and risk
management.(24)
The proposed new prudential standards will see
minimum statutory capital requirements increase for most insurers
and the minimum level of capital for general insurers will be
raised from $2 million to $5 million.(25)
The Government has also indicated in relation to
prudential standards that risk weighted capital adequacy, similar
to that used in banking regulation will be introduced, allowing
different insurance product lines to require different amounts of
capital to be held by the insurer.(26)
As noted in the Government's Explanatory Memorandum
to the Bill, a long and wide ranging consultative process has been
undertaken with general insurers and industry bodies in relation to
the amendments proposed by this Bill and the forthcoming prudential
standards. In addition to issuing discussion papers on the proposed
form of this Bill and the key aspects of the proposals for general
insurance reform, APRA has issued several drafts of the proposed
prudential standards. These draft standards can be viewed at:
http://www.apra.gov.au/policy/general_insurance_discussion_papers/default.htm.
- Australian and New Zealand Insurance Reporter, CCH
Australia Limited, Vol 1, p. 2,001.
- (1993) 7 ANZ Insurance Cases 61-195.
- Australian and New Zealand Insurance Reporter, CCH
Australia Limited, Vol 1, p. 2,002.
- ibid., at p. 4,702-4,704.
- Each State and Territory is accorded power under the
Constitution to write insurance. The State and Territory
Governments have established statutory insurance corporations.
These bodies derive all their powers from an Act of the relevant
State or Territory Government. A number of State insurance offices
have been privatised. For example, the NSW State Government
Insurance Office was privatised in 1992. Once a State or Territory
insurance office has been privatised it no longer comes under the
jurisdiction of the relevant State or Territory government, it
becomes subject to the Commonwealth's legislation.
- Insurance Act 1973 section 3(1) (see also
Australian and New Zealand Insurance Reporter, CCH
Australia Limited, Vol 1, pp. 5,006 and 5,007).
- Insurance Act 1973 section 23.
- See for example: Insurance Act 1973 sections 52, 54
and 55.
- Insurance Act 1973 section 36.
- ibid.
- Insurance Act 1973 section 29.
- APRA General Insurance Trends - December Quarter
2000.
- Members of the ICA include: AAMI, Australian Associated Motor
Insurers Limited, Aioi Insurance Co., Limited, Allianz Australia
Insurance Limited, American Home Assurance Company, AMP General
Insurance Limited, AON Group, Australian Unity General Insurance
Limited, BHP Marine & General Insurances Pty Limited, Catholic
Church Insurances Limited, CGU Insurance Limited, Elders Insurance
Limited, Employers' Mutual Limited, Fortis Australia Limited, GE
Mortgage Insurance Pty Ltd, Hallmark General Insurance Co Limited,
ING Australia Holdings Limited, Lloyd's Australia Limited, Munich
Reinsurance Company of Australasia Limited, NIPPONKOA Insurance
Company Limited, NRMA Insurance Group Limited, Professional
Indemnity Insurance Company Australia Pty Ltd, QBE Insurance
(Australia) Ltd, RAC Insurance Pty Limited, Suncorp Metway
Insurance Limited, Wesfarmers Federation Insurance Limited, Westpac
General Insurance Limited and Zurich Financial Services Australia
Limited.
- http://www.ica.com.au/hotissues/prureg.asp
- http://www.ica.com.au/hotissues/200105PruReg.pdf
- House of Representatives, Hansard, 28 June 2001, p.
28814.
- ibid.
- General Insurance Reform Bill 2001, Explanatory
Memorandum, p. 1.
- ibid.
- ibid.
- ibid.
- For a background to the HIH collapse see Department of the
Parliament Library, E-Brief -HIH Insurance Group Collapse at
http://www.aph.gov.au/library/intguide/econ/hih_insurance.htm.
- To compound is to settle a debt due and owing by agreeing to
accept a lesser amount.
- House of Representatives, Hansard, 28 June 2001, p.
28814.
- ibid.
- ibid.
Ian Ireland
20 August 2001
Bills Digest Service
Information and Research Services
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is taken to ensure that the paper is accurate and balanced, the
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(IRS). Advice on legislation or legal policy issues contained in
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ISSN 1328-8091
© Commonwealth of Australia 2000
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