Australia: Insurance regulation in Australia

Ten things to know

Contributed by: Norton Rose Fulbright

  1. The regulator

The Australian Prudential Regulation Authority (APRA) is the prudential regulator, and the Australian Securities and Investments Commission (ASIC) is the consumer protection regulator, for the insurance industry.

General (including Health Insurers) and life insurers and reinsurers carrying on business in Australia must be authorised by, or registered with, APRA.

Insurers, insurance brokers, agents and other distributors must hold an Australian financial services licence (AFSL) issued by ASIC, be authorised by a licensee or rely on an exemption from the licensing requirements.

A reinsurer may operate from abroad without registering with APRA or holding an AFSL.

  1. Subsidiary/branch

A foreign life insurer may establish a locally incorporated subsidiary to carry on life insurance business in Australia. Alternatively, a US registered life insurer may seek to operate in Australia through a branch as an Eligible Foreign Life Insurance Company (EFLIC).

A foreign general insurer may establish a locally incorporated subsidiary to carry on insurance business in Australia (foreign-owned subsidiary) or it may establish a branch (branch of foreign insurer).

EFLIC, foreign-owned subsidiaries and branches of foreign insurers are subject to the same APRA requirements as Australian insurers but have different governance requirements.

  1. FDI restrictions

Generally, approval of the Foreign Investment Review Board must be obtained prior to any foreign person acquiring a direct or indirect interest of 15 per cent or more in an Australian company through the acquisition of shares or assets in the Australian company or any offshore parent of that company.

  1. Change of control approvals

In addition to the FDI restrictions, an entity that holds an AFSL must notify ASIC of any change in control within 10 business days after the change occurs. 'Control' includes having more than 50 per cent of the votes or shares in the entity or having the capacity to appoint its directors or determine its financial operating policies.

  1. Minimum capital

The APRA prescribed minimum capital amounts for insurers are:

  • Life insurer – A$10 million
  • General insurer – A$5 million (A$2 million for captives).

A$1.39 = US$1.00 as at January 1, 2017

There are no minimum capital requirements for insurance brokers, agents and financial advisers.

  1. Risk based capital – insurers

An insurer must have capital in excess of its Prudential Capital Requirement (PCR).

The PCR is the prescribed capital amount plus any supervisory adjustments made by APRA in respect of each insurer.

The prescribed capital amount can be calculated using either APRA's 'Standard Method' or an internal model approved by APRA. The Standard Method calculates the capital amount based on insurance risk, asset risk, asset concentration risk and operational risk.

Life insurers additionally have a separate solvency requirement. Under the solvency requirements, a life insurer's statutory fund must have a capital base that exceeds 90 per cent of the fund's prescribed capital amount.

  1. Group supervision

APRA has the power to authorise (in the case of a general insurer) or register (in the case of a life insurer) an Australian incorporated non-operating holding company (NOHC) which owns at least one Australian authorised/registered insurer.

An 'insurance group' exists if an Australian insurer has controlled entities or is itself the subsidiary of an authorised/ registered NOHC. This provides APRA with some level of control over the group that the insurer or NOHC manages. Most of APRA's powers that apply to an insurer, also apply to a NOHC.

APRA can impose directions on the insurer or NOHC to take specified actions in relation to their subsidiaries.

Furthermore, APRA has recently extended its supervisory powers over Australian established non-APRA-regulated institutions that are part of a conglomerate group that carries on insurance business in Australia. Currently, APRA has direct oversight of all such entities within those groups in the areas of group governance and risk management. This means that APRA will have direct oversight of all of the Australian subsidiaries of an insurer or NOHC.

  1. Policyholder protection

Life insurer

Life insurers are required to maintain statutory funds, which act as a mechanism for quarantining the life insurance business of the company from any other business of the company.

General insurer

APRA administers the Financial Claims Scheme (FCS), which makes payments to certain policyholders with valid claims on an insolvent general insurer. The Government funds the payments made under the scheme and then seeks recovery from the general insurer in the winding up process. Any shortfall may be recovered through a levy on the general insurance sector.

  1. Portfolio transfers

Court approval

The transfer of life or general insurance business within Australia must be carried out by a scheme confirmed by the Federal Court of Australia.

The insurer must provide a copy of the scheme to APRA and ASIC and an approved summary of the scheme to each affected policy owner. A notice of intention to make the application must also be published in the Federal Government Gazette and advertised in the one or more newspapers approved by APRA.

APRA approval

Alternatively, two registered life insurers may apply to APRA for approval of a transfer of business between them under the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth).

  1. Outsourcing

If an insurer outsources any material business activity, it must implement a written policy, approved by its board of Directors, to monitor and manage the outsourcing arrangement. A 'material business activity' is one that may, if disrupted, have a significant impact on the insurer's business operations or its ability to manage risks effectively. Generally, material outsourcing arrangements must be documented in a legally binding agreement, which must include terms relating to the services to be provided, fees, liability, as well as review and audit procedures. Outsourcing to offshore service providers may be permitted after consultation with APRA.

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Ray Giblett
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