Australia: APRA’s Proposals For Local General Insurers, Captives And Offshore Foreign Insurers

Last Updated: 8 August 2007
Article by Marianne Robinson

The Australian Prudential Regulatory Authority (APRA) has released for discussion its proposed refinements to the prudential framework which will affect all APRA-authorised general insurers. The move follows the introduction of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 into Parliament on 21 June 2007.

While the catalyst for the refinements is the regulation of Direct Offshore Foreign Insurers (DOFIs), the entities that will be affected by the refinements are much broader. These are:

  • All existing APRA-authorised insurers.
  • DOFIs that intend to become APRA-authorised insurers.
  • Australian-owned sole parent captive insurers.
  • Australian-owned association captive insurers that are not APRA-authorised.

From 1 July 2008, any DOFI wishing to carry on insurance business in Australia will become subject to prudential regulation. Amendments to the Insurance Act 1973 will extend the definition of 'insurance business' to DOFIs that carry on insurance business in Australia, either directly or through the actions of another (for example, an insurance agent or broker). It will be an offence to carry on insurance business without authorisation. It will also be an offence for an intermediary to place insurance business with an unauthorised entity.

DOFIs currently sell insurance to Australians either directly, over the internet or through Australian-based intermediaries. They are estimated to service around 2.5% of the overall general insurance market as well as having a presence in the specialised and niche markets, such as directors' and officers' liability, professional indemnity, machinery breakdown, sport, ponies, nannies and tools of trade.

Reforms will apply to all insurers operating in Australia

At present there are 132 authorised insurers operating in Australia. APRA’s discussion paper stated that the proposed changes to the prudential framework would affect all of them ‘to varying degrees’.

The APRA proposals recognise five different categories of insurer, based on their risk profiles:

  • Category A: locally incorporated insurer (this will include all medical indemnity insurers).
  • Category B: wholly owned subsidiary of a local or foreign insurer.
  • Category C: foreign insurer operating as a foreign branch.
  • Category D: association captive.
  • Category E: sole parent captive.

Association captive

An association captive will be an insurer owned by an industry or a professional association, or by the members of the industry or professional association, or a combination of both. It only underwrites the business risks of the members of the association or those who are eligible, under the articles of association or constitution of the association, to become members of the association. Category D insurers could be mutual companies or shareholder companies.

Sole parent captive

A sole parent captive may be either a corporate captive or a partnership captive. Category E insurers will generally be shareholder companies. A corporate captive insurer is one that is owned by a single company or a group of related bodies corporate as defined by section 50 of the Corporations Act. It exists for the purpose of underwriting the risks of the parent company or members of a group of related companies, and perhaps also joint venture partners and contractors of the members of the group of companies. A partnership captive is owned by a partnership and exists for the purpose of underwriting the business risks of the partners and/or the partnership.

Changes to existing prudential standards

Changes are proposed in relation to a range of existing prudential standards, including:

  • Amendments to GPS 110 arising from the current consultation process which started in July 2007 with the release of APRA's discussion paper, 'Capital adequacy for authorised deposit-taking institutions and general insurers'.
  • Amendments to the general insurance prudential framework arising from the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 when it is passed
  • Changes to GPS 310 as a result of the Institute of Actuaries of Australia's finalisation of the revised 'Professional Standard 300 - valuations of general insurance liabilities'.
  • Changes in the investment capital factors that APRA proposes to introduce under GPS 110 in relation to property and equity investments, following a reassessment of the volatility of these asset classes.
  • Modification of the reporting standards so that premiums for bound but not incepted business are identified as a separate item to allow a clear comparison of prospective and accrual bases of reporting.
  • The introduction of a higher investment risk charge on reinsurance recoverables relating to foreign reinsurers. Foreign reinsurers with the same credit rating will attract a higher risk investment charge of 2% over that applied to APRA-authorised reinsurers with the same credit rating.

DOFI assets in Australia

Under Section 28 of the Insurance Act, foreign insurers must hold assets in Australia (other than reinsurance recoveries from foreign reinsurers), through either an agent in Australia on trust or a local custodian, that at least cover their liabilities in Australia. The APRA proposals will amend GPS 120 to recognise that the requirement for a trust structure may not be essential for some forms of assets. APRA will continue to ensure that a foreign insurer is not allowed to change the location of its assets in Australia without the authorisation of its agent in Australia.

It is proposed that:

  • The requirement for real estate in Australia to be held by an agent or custodian be removed.
  • The delegation of authority by the agent holding debt and equity assets on trust be permitted to avoid involving the agent in day-to-day dealings.
  • The requirement for receivables to be held by an agent on trust or by a custodian be removed with the effect that the receivable can be in the name of the foreign insurer with the expectation that it will be paid into a bank account controlled by the agent or custodian. Receivables outstanding for more than six months will not be recognised as assets in Australia to allow for the gradual impairment of such assets with time.
  • Cosignatory arrangements for assets held by a custodian be allowed but any transaction involving disposal of assets in Australia should be restricted unless authorised by the agent in Australia.
  • Bank accounts be permitted to be held in the name of a foreign insurer with the requirement that any withdrawals from such accounts to be authorised by the agent in Australia.

Appointment of agents in Australia

The Insurance Act amendments will allow insurers to appoint corporate agents rather than individual agents as presently required. Corporate agents will have to comply with fit and proper requirements. Current fit and proper requirements for an individual agent will be applied to the directors and senior managers of a corporate agent. APRA has proposed that there should be a minimum of three directors for the board of a corporate agent.

Solvency test

The solvency test for association and sole parent captives will be reduced so that calculated risk-based minimum capital requirement is AU$2 million (rather than the current AU$5 million). APRA’s expected buffer over the minimum capital requirement will, however, increase from 20% to 50% when the insurer’s minimum capital requirement is less than AU$5 million. Sole parent captives will be allowed to lend back to the parent group on commercial terms. In the case of association captives, outsourcing of material business activities to related parties will be required to be documented in written contracts. The total amount of premium for either type of captive that may be ceded to reinsurers is not expected to exceed 90% of gross written premium. In the case of category A, B and C insurers, the total amount of premium that an insurer may cede to reinsurers is not to exceed 60% of gross written premium.


The proposals do not apply to offshore foreign reinsurers and the discussion paper does not address the proposed exemptions from prudential regulation being developed by Treasury.

Parliament is expected to pass the changes to the Insurance Act in the second half of 2007. The changes are intended to take effect on 1 July 2008. Modifications to APRA’s prudential framework will generally be effective from 1 July 2008.

APRA intends to publish a response paper and draft prudential standards in the fourth quarter of 2007. The final prudential standards are expected to be released in early 2008 so that DOFIs and others in the insurance industry are better placed to accommodate the prudential framework that will apply from 1 July 2008.

The timeframe for the implementation of the proposed reforms leaves general insurers, and in particular DOFIs and captives, with little time to assimilate the reforms and implement changes as required. APRA’s discussion paper does not address the proposed exemptions from prudential regulation foreshadowed in the Government’s earlier announcements. This makes it difficult to weigh up the various options that are available.

The Treasury is developing options for such exemptions and intends to issue a separate consultation paper on this topic. APRA has invited interested parties, including local and foreign insurers, insurance agents and brokers, reinsurers and buyers of insurance, to comment on the proposed refinements to the prudential framework that are intended to apply from 1 July 2008.

The discussion paper can be viewed on APRA’s web site at

We can help

We suggest that you consider carefully the proposals and their impact on your business operations. The reforms will impact not only on insurers carrying on business in Australia but industry captives, as well as the purchasers of insurance and intermediaries involved in the arrangement of insurance.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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