Australia: Its beginning to look a lot like… the pre-Christmas (regulation) rush

Last Updated: 18 January 2012
Article by Greg Moss

All I want for Christmas capital standards

The Australian Prudential Regulation Authority (APRA) has released a response paper and 14 draft prudential standards in a third round of consultations on its review of capital standards for general and life insurers. As discussed in our April 2011 update (see here), according to APRA, the aims of the review include improving the risk sensitivity of the standards and achieving better alignment across APRA-regulated industries.

The response paper released late last week summarises the main issues raised in submissions on APRA's March 2011 response paper, and arising from APRA's assessment of the second quantitative impact study (QIS) results. APRA has revised its proposals in some areas to address issues raised in submissions and has provided further clarification on other aspects of its proposals.

The response paper outlines the proposed eligibility requirements for components of the capital base for insurers, and the proposed limits for the components of the capital base. These eligibility requirements and limits have been aligned with the relevant proposed Basel III requirements for authorised deposit-taking institutions (ADIs) where appropriate.

The second QIS results indicated that APRA's proposals would increase overall capital requirements across both industries, but to a much lesser extent than indicated by the results of the first QIS. APRA expects that the increase in capital requirements will be less in practice than indicated by QIS2 as insurers revise their business and capital management strategies in response to the revised capital standards.

Submissions on this response paper and the draft standards are due by 24 February 2012. Following consideration of submissions, APRA plans to issue final capital standards in May 2012, together with drafts of other prudential standards with consequential changes. APRA will also consult in 2012 on the reporting requirements for insurers. The new capital framework will be effective from 1 January 2013.

Review the response paper in full here.

Dashing through the snow (flood or storm etc...)

On 23 November 2011 the Insurance Contracts Amendment Bill 2011 was introduced into Parliament to provide a legislative framework to allow regulations to establish a standard definition of flood (see our previous update here). Treasury has now also released an exposure draft of the Insurance Contracts Amendment Regulations 2011. The draft regulations define 'flood' and specify that it is to be used in home building and home contents insurance contracts (whether offered separately or in combined form) and contracts held by small business and strata title residences.

The regulations include the proposed standard definition of "flood" to be used in these insurance contracts:

Flood means the covering of normally dry land by water that has escaped or been released from the normal confines any of the following:
  1. a lake (whether or not it has been altered or modified);
  2. a river (whether or not it has been altered or modified);
  3. a creek (whether or not it has been altered or modified);
  4. another natural watercourse (whether or not it has been altered or modified);
  5. a reservoir;
  6. a canal;
  7. a dam.

The proposed definition is consistent with the recommendation of the Natural Disaster Insurance Review, that the Government introduce a standard definition of 'flood' in the form proposed in the Assistant Treasurer's 'Reforming Flood Insurance: Clearing the Waters' consultation paper (see our previous updates here).

The Government is again seeking comments on the definition of 'flood' along with other aspects, including the definition of 'strata title residence', the application of the term 'flood' in the context of man-made watercourses and the test to determine whether a business is a small business for these purposes. The deadline for submissions is 3 February 2012.

The draft regulations can be viewed here.

We wish you a Merry Christmas and a Happy New Year...

BUT, at the risk of sounding like a few flogged reindeers, we nevertheless provide a few final thoughts about the definition of 'flood' for the year:

  • If introductory words are not going to be restricted, then the impact of phrases such as 'directly or indirectly arising out of or in connection with', 'occasioned by or happening through' and the like may continue to cause confusion.
  • In respect of flood exclusions and the implications of the introductory words, there should be a requirement for disclosure documents to contain a detailed explanation of the operation of the Wayne Tank principle1.
  • In the context of the standard definition of flood, further consideration could also be given as to whether any of the phrases and terms used in it, such as 'water that has escaped or been released', 'canal', and 'watercourse', themselves require definitions or clarification.


1Wayne Tank and Pump Co Limited v Employers Liability Insurance Corporation Limited [1974] QBE 57

For more information, please contact:


Ray Giblett

t (02) 9931 4833


Wendy Blacker

t (02) 9931 4922



David Slatyer

t (07) 3231 1532


This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.

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