## _cr12312

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---

### Executive Summary — Market overview and structure
- Insurers' assets represented "about 8 percent" of the financial system total assets as at end-2011.
- Number of insurers:
  - 2007: 190; 2011: 172.
  - Branches of foreign-owned general insurers: 2007 "36"; 2011 "43".
- Industry composition as at end-June 2011:
  - 24 life insurers; 108 general insurers; 19 reinsurers; 7 captive general insurers; 14 friendly societies.
- Table 1 (Assets as at 30/06/2011, A$ billions, percent of total financial sector assets):
  - General insurers: "115" — "2.6%"
  - Life insurers: "235" — "5.2%"
  - APRA-regulated institutions: "3,972" — "88.3%"
  - Total financial sector assets: "4,497"
- Insurance penetration and density as at 30 June 2011 (Table 2):
  - Insurance Penetration (As % of GDP):
    - General (Direct (include captives)): "2.5"
    - General (Reinsurance): "0.1"
    - Life (Direct): "2.7"
    - Life (Reinsurance): "0.2"
  - Insurance density (US$ per capita):
    - General (Direct (include captives)): "1,463"
    - General (Reinsurance): "88"
    - Life (Direct): "1,817"
    - Life (Reinsurance): "121"
- Trend in market structure (number of entities, end-June):
  - Life: 2007 "28"; 2008 "26"; 2009 "26"; 2010 "26"; 2011 "24"
  - General: 2007 "104"; 2008 "106"; 2009 "108"; 2010 "110"; 2011 "108"
  - Reinsurance: 2007 "27"; 2008 "24"; 2009 "22"; 2010 "18"; 2011 "19"
  - Authorised foreign branches (General): 2007 "36"; 2008 "40"; 2009 "45"; 2010 "47"; 2011 "43"

### Life insurance sector — concentration, business mix, risks, and key metrics
- Market concentration and ownership:
  - Top three life insurers accounted for "66 percent" of total life industry assets as at end-June 2011.
  - Of top 10 life insurance groups, only AMP, Colonial and Swiss Re had overseas operations.
  - More than 99 percent (weighted average) of premiums were sourced domestically.
  - Ownership of life industry assets: 92 percent Australian owners, French owners 6 percent, remaining 2 percent distributed among US, Switzerland, Germany and Hong Kong.
- Business mix and distribution:
  - Wealth management products (unit-linked) comprised "almost 70 percent" of life insurance business in 2010/11.
  - Life insurers offer superannuation products through statutory funds totaling A$ 38.7 billion as at end-2010 (3 percent of total superannuation assets).
  - Life insurers' share of total Australian superannuation assets fell from "44 percent" (20 years ago) to "15 percent" in early 2012.
  - Life insurers' superannuation assets grew at "6 percent per annum" (largely due to investment earnings).
  - The merged entity (AMP and AXA Asia Pacific Holdings' Australian and New Zealand business) has A$ 130 billion in funds under management.
  - Distribution: mainly independent or aligned advisers; direct sales (television, internet) growing rapidly from a small base; simple direct products targeted at lower socioeconomic demographics.
- Growth, profitability and products:
  - Risk insurance business growth: "more than 10   percent" annually in recent years; life risk insurance business expanded by "10 percent" in 2010.
  - Popular products: age-rated guaranteed renewability policies for death, disability covers; allocated pension (unitized market-linked); little interest in annuities.
  - As at end-June 2011: Total life insurers' assets: A$ 230 billion (rose by 1.5 percent from A$ 227 billion).
  - Asset mix: equities A$ 117 billion (51 percent); debt securities A$ 71 billion (31 percent); cash/bank balances A$ 17.4 billion.
  - Profitability: stabilized to pre-2008/09 levels, driven by investment earnings on reserves and retained profits for non-investment-linked business; aggregate claims experience deteriorated insurer-specifically.
- Capital adequacy and liabilities:
  - Overall capital adequacy coverage ratio for life industry: 142 percent as at end-June 2011 (from 149 percent as at end-2009/10).
  - Aggregate technical provisions (TP): A$ 201.8 billion (88 percent of total liabilities).
  - Total shareholders' funds: A$ 16.2 billion.
- Major lines of life insurance business (Net Premiums Written, A$ million; percent domestic risks):
  - 2009: Total 41,684 — Participating: 2,888 (4.7%); Term: 5,540 (19.2%); Annuities: 913 (5.4%); Unit-linked: 31,969 (69.8%); Foreign risks total: 1,156
  - 2010: Total 38,347 — Participating: 2,658; Term: 6,443; Annuities: 1,069; Unit-linked: 27,835; Foreign risks total: 1,156
  - 2011: Total 35,674 — Participating: 1,668; Term: 6,842; Annuities: 1,912; Unit-linked: 24,911; Foreign risks total: 1,182
- Key risks and insurer responses:
  - Key risks: depressed financial markets, inadequate pricing (e.g., group risk schemes), strategic refocusing due to regulatory developments.
  - Concerns over sustainability of pricing for large group risk schemes given reductions in premiums and generous profit sharing.
  - Insurers reviewing strategies, capital management, governance, compliance, distribution channels and competence.
  - Move to greater direct marketing channels may pose underwriting and pricing risks.

### General insurance sector — product mix, concentration, catastrophe and reinsurance risks, and metrics
- Product mix and concentration:
  - Property and motor insurance accounted for "more than half" of general insurance business for the past three years.
  - Top three insurers accounted for about "75 percent" of earned premiums from personal lines in 2010/11; commercial lines less concentrated.
  - Of 19 insurance groups, only QBE had significant overseas operations (more than two-thirds of its premiums and assets as at end-June 2011).
- Gross premiums written (A$ million):
  - 2009: Total 29,960 — Motor: 7,780 (26.1%); Property: 7,758 (27.5%); Liabilities: 6,828 (22.8%); Accident and health: 947 (3.1%); Others: 5,490 (16.9%); Foreign risks total: 1,156 (3.7%)
  - 2010: Total 31,304 — Motor: 8,339; Property: 8,472; Liabilities: 7,262; Accident and health: 968; Others: 5,106; Foreign risks total: 1,156
  - 2011: Total 32,348 — Motor: 8,433; Property: 8,883; Liabilities: 7,374; Accident and health: 1,013; Others: 5,463; Foreign risks total: 1,182
- Assets and reinsurance:
  - As at end-June 2011: total assets of general insurers: A$ 100 billion (rose 14 percent).
  - Government securities: A$ 12.7 billion; Corporate securities: A$ 17.6 billion; Reinsurance recoverables: A$ 15.2 billion (more than 90 percent due from reinsurers rated A or above); Cash and bank balances: A$ 1.7 billion; Intra-group receivables: A$ 4 billion.
- Catastrophe impacts and claims:
  - Gross losses estimated: Christchurch earthquake A$ 11.2 billion; March 2010 Melbourne and Perth storms and December 2010 Queensland floods A$ 42.6 billion (Insurance Council of Australia estimate).
  - Reinsurers raised renewal rates and were reluctant to write lower catastrophe layers or aggregate programs, causing some insurers to retain higher catastrophe risks.
  - Insurers increased TP for long-tail claims due to decline in risk-free rates used to discount liabilities; small underwriting loss mitigated by higher valuation gains from duration-matched assets.
- Capitalization:
  - General insurance industry held capital resources equivalent to 175 percent of the minimum capital requirement as at end-June 2011 (from 191 percent as at end-June 2010).
  - TP increased from A$ 51.9 billion to A$ 64.8 billion (65 percent of total liabilities).
  - Aggregate shareholders' funds: A$ 25.1 billion (A$ 25.9 billion as at end-June 2010).
  - Intra-group liabilities: A$ 4.3 billion or 17 percent of shareholders' funds.
- Key risks and supervisory expectations:
  - Key risks: catastrophic exposures; reinsurance concentration and placement risks.
  - APRA expects insurers to enhance stress testing, including scenarios with potential increases in reinsurance rates and severe reduction in reinsurance capacity.
  - Natural Disaster Insurance Review (final report November 2011) recommended requiring flood cover as standard in home building and contents policies and a government agency to coordinate national flood risk management (including flood mapping).
  - Proposed harmonization of capital standards for life and general insurers may have significant implications for some general insurers.

### Reinsurance market
- APRA-authorized reinsurance operations in Australia are small.
- Top three general reinsurers by gross earned premiums: Munich Re, Swiss Re and Hannover Re (operate through branches).
- General Re is the only APRA-authorized general reinsurer locally incorporated.
- Top three APRA-authorized life reinsurers: Swiss Re, Munich Re and RGA Reinsurance Company (locally-incorporated companies).
- Reinsurance premium figures:
  - Net premiums of life reinsurers: A$ 1.6 billion in 2010/11 (increase of 12 percent from 2009/10).
  - APRA-authorized general reinsurers wrote about A$ 1.5 billion (marginal increase from 2009/10).
  - Reinsurance premiums for life business hovered around A$ 1.5 billion for past three years; for general business about A$ 1.4 billion.
- A new life reinsurer (SCOR Re) was admitted into the life insurance market in Australia.

### Institutional framework, crisis coordination and markets
- Functional regulatory structure:
  - APRA: prudential regulation and supervision of regulated institutions.
  - ASIC: market conduct regulation and supervision.
  - RBA: monetary policy, financial system stability and payments system oversight.
  - Treasury: advises Government on financial sector regulation framework and Treasurer’s powers.
  - Council of Financial Regulators (CFR): coordination forum (RBA Governor chair) for APRA, ASIC, RBA and Treasury.
- Crisis management:
  - APRA is lead resolution authority for prudential supervision; enhancements include strengthened statutory powers, formalised CFR coordination, Financial Claims Scheme, crisis resolution strategies, simulation exercises, and cross-border coordination with New Zealand.
- Financial markets — key statistics:
  - ASX market capitalization: "1.17 trillion" as at end-2011.
  - ASX average daily turnover: A$ 5 billion.
  - Over-the-counter market turnover: A$80 trillion in financial year 2010/11.
  - Corporate bond turnover: A$    900 billion in FY 2010/11.

### Regulatory framework, supervision, and reform initiatives (APRA and ASIC)
- APRA reforms and initiatives (2011/12):
  - Updating and harmonizing capital requirements for general and life insurers; enhancing risk-sensitivity.
  - APRA expected to release final revised capital standards in May 2012 with effective date 1 January 2013.
  - Consultation paper on Level 3 Supervision (prudential framework for conglomerate groups).
- APRA supervisory framework and resources:
  - APRA’s risk-based supervision anchored on PAIRS (Probability and Impact Assessment of Insurer Failure) and SOARS (Supervisory Oversight and Response System).
  - APRA publishes prudential standards, practice guides and statistical publications; about 80 percent of APRA's data collections are shared with or collected on behalf of other agencies (RBA, ABS).
  - APRA considers it has adequate supervisory resources and technical capacity; industry participants hold APRA supervisors in high regard.
- ASIC conduct supervision and resource constraints:
  - ASIC adopts a predominantly desktop approach to conduct supervision due to large numbers of licensees and limited resources; supervisory activities typically triggered by industry intelligence, complaints and breach reports.
  - Funding: in 2011-12 non-core funding accounted for "18.7 percent" of ASIC’s funding; ASIC dependent on Government appropriation.
  - ASIC staff turnover: ongoing employee turnover rate "12.5 percent" as of November 2011 (rolling 12 month average); internal survey self-reported staff retention over next two years "59 percent".
  - Recommendation: strengthen ASIC’s resources and legal powers to improve oversight of market conduct and consumer protection.

### Observance with Insurance Core Principles (ICPs) — aggregate levels and selected findings
- Aggregate observance (26 ICPs):
  - Observed (O): 14
  - Largely observed (LO): 9
  - Partly observed (PO): 3
  - Not Observed (NO): 0
- Selected ICP findings (levels preserved):
  - ICP 1: LO — responsibilities shared; gaps in ASIC rule-making power.
  - ICP 2: PO — concerns on operational independence, accountability, transparency and adequacy of resources for APRA and ASIC; Ministerial powers and funding dependencies noted.
  - ICP 3: O — APRA empowered to obtain and exchange information; IAIS MMoU signatory.
  - ICP 4: O — APRA licensing authority under IA and LIA; clear procedures.
  - ICP 5: LO — fit and proper requirements; notification gaps for significant owners.
  - ICP 6: LO — ownership/control thresholds and approvals; insurers not required to notify APRA of decreases below control levels.
  - ICP 7: O — extensive corporate governance requirements; scope to enhance disclosures.
  - ICP 8: O — APRA emphasis on risk management and internal controls.
  - ICP 9: LO — APRA risk-based framework comprehensive; ASIC mostly desktop reviews.
  - ICP 10: O — SOARS supports escalation; APRA wide powers.
  - ICP 11: O — APRA enforcement powers expanded; dedicated Enforcement Unit.
  - ICP 12: LO — APRA intervention powers; creditor ranking and policyholder protection issues.
  - ICP 13: O — strong reinsurance coverage oversight.
  - ICP 14: O — valuation frameworks in place; risk margins applied.
  - ICP 15: O — broad investment choice; suggestion for additional quantitative restrictions.
  - ICP 16: LO — enterprise risk management evolving; LAGIC to strengthen framework.
  - ICP 17: LO — solvency control levels lack transparency and consistency.
  - ICP 18: O — mature intermediaries regime; ASIC supervision reactive.
  - ICP 19: PO — high-level principles exist but need clearer guidance and competency standards; ASIC gaps in claims/practices supervision.
  - ICP 20: PO — disclosure requirements not fully aligned with IAIS 2011; exemptions for small/unlisted insurers.
  - ICP 21: O — fraud illegal; APRA assesses fraud frameworks; ASIC surveillance.
  - ICP 22: O — AML/CTF awareness; life insurance covered by AML/CTF Act; general insurance subject to FTR Act only.
  - ICP 23: LO — effective Level 2 for general insurers; Level 2 for life insurers not fully developed; Level 3 planned.
  - ICP 24: O — APRA has comprehensive macroprudential processes; plans to increase stress testing.
  - ICP 25: O — APRA coordination domestically and internationally; MoUs and cross-border arrangements.
  - ICP 26: LO — APRA has working relationships with foreign supervisors; no requirement for insurers to maintain recovery/resolution plans.

### Key recommendations (preserved wording and numbering)
- ICP 1:
  - Legislation should be amended to give ASIC the power to make rules, which will help to close gaps in the current regulatory framework for conduct of business.
- ICP 2:
  - a) Eliminate or further restrict the ability of the Minister to give directions to APRA and ASIC on matters of supervisory policy;
  - b) Eliminate or further restrict the involvement of the Minister in decisions related to individual regulated entities or individuals; and
  - c) Consider the various possibilities to arrange the funding of APRA and ASIC in such a manner that will ensure they will have the resources needed to respond to the current and emerging supervisory challenges.
- ICP 5:
  - a) requiring insurers to notify APRA of any circumstances that may materially adversely affect the suitability of significant owners; and
  - b) separating “Key Persons in Control Functions” from the definition of “senior manager” under “responsible persons”.
- ICP 6:
  - Insurers should be required to notify APRA on any significant decrease in the ownership by a person(s) below the pre-determined control level approved by the Minister.
- ICP 7:
  - Amend requirements to more explicitly indicate the responsibility of Boards to maintain and enforce policies to deal with conflicts of interest.
  - All insurers should be required to disclose their governance practices in their annual reports.
- ICP 8:
  - APRA should consider requiring each insurer to designate an officer with overall responsibility for compliance.
- ICP 9:
  - a) review the effectiveness of ASIC‟s current predominantly desktop approach to supervising insurers‟ conduct of business;
  - b) empower ASIC to inspect service providers of outsourced functions by insurers; and
  - c) ensure that ASIC is equipped with adequate supervisory resources including the technical capacity for effective and proactive supervision of insurers‟ conduct of business.
- ICP 11:
  - Maintain momentum for on-going review on harmonising the powers of APRA across financial sectors (noting differences remain, e.g., lack of power to revoke the license of a life insurer directly).
- ICP 12:
  - Consider providing for the legal priority of claims by policyholders of general insurers over unsecured creditors, and greater legal priority of life policyholders‟ claims to the assets of other statutory funds, ahead of unsecured creditors.
- ICP 14:
  - APRA should consider specifying the level of uncertainty to be provided for by the risk margins in life insurance liabilities.
- ICP 15:
  - APRA should consider the establishment of additional quantitative restrictions (e.g., on large exposures, investments with related parties, more-complex and less-transparent classes of assets, and investments in markets or instruments that are subject to less governance or regulation).
  - APRA should also formally extend its supervision to life insurance groups, which would include relevant investment requirements.
- ICP 16:
  - Whether through LAGIC or otherwise, APRA should enhance the requirements on enterprise risk management, including explicit description of relationships between risk tolerance limits, regulatory capital requirements, economic capital, and monitoring processes; require documentation of approaches to measuring risks and establishment of quantitative and qualitative risk tolerance levels; and provide more explicit guidance on own risk and solvency assessments.
- ICP 17:
  - APRA should take steps to increase the transparency and ensure the consistency of the solvency control levels.
- ICP 19:
  - a) implementing the enhanced training and competencies standards proposed by ASIC;
  - b) requiring insurance intermediaries to ensure the privacy protection of customers;
  - c) empowering ASIC to establish or enforce regulatory requirements to ensure fair treatment of customers and product development; and
  - d) ensuring that ASIC is adequately resourced to conduct proactive supervision to prevent misconduct.
- ICP 20:
  - APRA and ASIC should cooperate to identify and deal with shortcomings in disclosure requirements, including:
    - a) the exemption of small and unlisted insurers from many disclosure requirements;
    - b) the limited detail disclosed on the capital adequacy of life insurers;
    - c) the need for disclosure of an analysis of sources of earnings; and
    - d) the need for comprehensive disclosures on corporate governance, risks and risk management.
  - Authorities should consider requiring all insurers to make their audited financial statements and required disclosures available to the public at no cost.
- ICP 21:
  - ASIC might further strengthen its oversight of the fraud controls of AFSL holders by adopting a more proactive inspection program.
- ICP 22:
  - Authorities should periodically reconsider whether or not general insurance should be subject to the more comprehensive requirements prescribed by the AML/CTF Act.
- ICP 23:
  - The impending introduction of Level 3 supervision of financial conglomerates will formalise group regulatory requirements for life insurers. Authorities should incorporate group-wide market conduct requirements in both Level 2 and Level 3 supervision frameworks.
- ICP 26:
  - Authorities should implement the requirement for insurers to establish and maintain contingency plans and procedures for use in a going- and gone- concern situation.

### Authorities' response and points of disagreement
- Authorities' appreciation and commitment:
  - "The Australian authorities wish to express their appreciation to the IMF and its assessment teams for their assessment."
  - Australia "strongly committed to the FSAP process and the insights that the FSAP provides into a country‘s financial sector."
  - Authorities acknowledge importance of continual review and improvement of regulatory framework and supervision practices.
- Areas where authorities disagree or note qualifications:
  - CP 17 (Capital adequacy): Authorities strongly disagree with LO rating; APRA asserts robust, consistent and transparent capital framework with MCR and PCR calibrated per-insurer; intends to retain approach under new capital framework effective 1 January 2013.
  - CP 2 (The supervisor): Authorities consider assessment overstates impacts on regulator independence and focuses on process rather than outcomes; APRA and ASIC are statutory authorities with substantial statutory and operational independence.
  - CP 20 (Public disclosure): Authorities accept assessment but emphasize existing public disclosure obligations under Corporations Act and Australian accounting standards; will consider aligning unlisted insurers' disclosure with international standards.
  - CP 19 (Conduct of Business): Authorities accept some findings but highlight existing protections in Corporations Act and Insurance Contracts Act; note funding/resource implications for expanded supervision.
  - CP 5 and CP 6 (Suitability/Changes in control): Authorities accept recommendations but note no evidence of adverse prudential outcomes from current arrangements.
  - CP 26 (Cross-border crisis management): APRA considering scope of recovery planning; insurers to maintain ICAAPs under changes effective 1 January 2013.
  - CP 22 (AML/CFT): National threat assessment in 2011 did not reveal money laundering through general insurance to be a threat; authorities will continue monitoring.

*Source: _cr12312 - Executive Summary and IMF staff assessment content provided in the supplied PDF excerpt.*

### Executive Summary ......................................................................................................

### Executive Summary

### Market overview and structure
- Insurers' assets represented "about 8 percent" of the financial system total assets as at end-2011.
- Since 2007 the total number of insurers fell from 190 to 172; branches of foreign-owned general insurers rose from 36 to 43.
- Industry composition as at end-June 2011:
  - 24 life insurers
  - 108 general insurers
  - 19 reinsurers
  - 7 captive general insurers
  - 14 friendly societies
- Table 1 (Assets as at 30/06/2011):
  - General insurers: "115" (A$ billions) — "2.6%"
  - Life insurers: "235" (A$ billions) — "5.2%"
  - APRA-regulated institutions: "3,972" (A$ billions) — "88.3%"
  - Total financial sector assets: "4,497" (A$ billions)
- Insurance penetration and density as at 30 June 2011 (Table 2):
  - Insurance Penetration (As % of GDP)
    - General (Direct (include captives)): "2.5"
    - General (Reinsurance): "0.1"
    - Life (Direct): "2.7"
    - Life (Reinsurance): "0.2"
  - Insurance density (US$ per capita)
    - General (Direct (include captives)): "1,463"
    - General (Reinsurance): "88"
    - Life (Direct): "1,817"
    - Life (Reinsurance): "121"
- Trend in market structure (Table 3) — number of entities as at end-June:
  - Life: 2007 "28"; 2008 "26"; 2009 "26"; 2010 "26"; 2011 "24"
  - General: 2007 "104"; 2008 "106"; 2009 "108"; 2010 "110"; 2011 "108"
  - Reinsurance: 2007 "27"; 2008 "24"; 2009 "22"; 2010 "18"; 2011 "19"
  - Authorised foreign branches (General): 2007 "36"; 2008 "40"; 2009 "45"; 2010 "47"; 2011 "43"

### Life insurance sector — concentration, business mix, risks
- Concentration:
  - The top three life insurers accounted for "66 percent" of total life industry assets as at end-June 2011.
- Business focus:
  - Wealth management products made up "almost 70 percent" of life insurance business.
  - Life insurers' share of superannuation assets fell from a peak of "44 percent" (20 years ago) to "15 percent" of total superannuation assets.
  - Four banking groups continue to dominate wealth management markets, partly through wholly-owned life insurance subsidiaries.
- Growth and product trends:
  - Risk insurance business has been growing at "more than 10   percent" annually in recent years, largely boosted by default insurance cover offered by superannuation schemes.
- Key risks:
  - Depressed financial markets adversely impacting investment performance.
  - Inadequate pricing (e.g., for group risk schemes).
  - Refocusing of strategies in response to domestic and global regulatory developments.

### General insurance sector — product mix, concentration, catastrophe and reinsurance risks
- Product mix:
  - Property and motor insurance accounted for "more than half" of general insurance business for the past three years.
- Market concentration:
  - The top three insurers accounted for about "75 percent" of earned premiums from personal lines in 2010/11; less concentration exists in commercial lines.
  - Of the 19 insurance groups, only QBE Insurance Group had a significant share of operations overseas.
- Performance and risk exposures:
  - Despite natural disasters in 2010/11 (e.g., flood in Queensland and earthquake in Christchurch), general insurers reported profits, albeit at a lower level.
  - Gross exposures were dampened by reinsurance programs, but reinsurers raised renewal rates and some reinsurers were reluctant to write lower layers of catastrophe cover or offer aggregate reinsurance programs.
  - Key risks: catastrophic exposures; reinsurance concentration and placement risks.

### Regulatory framework, supervisory arrangements, and reforms
- Regulatory structure:
  - Australia adopts a functional regulatory structure:
    - APRA (Australian Prudential Regulation Authority) is responsible for prudential regulation and supervision of regulated institutions.
    - ASIC (Australian Securities and Investment Commission) is responsible for market conduct regulation and supervision.
- Reforms and progress since 2006 FSAP:
  - Significant progress made addressing 2006 recommendations, including:
    - Implementation of Stage II reforms and Level 2 supervision of general insurance groups.
    - Broadening APRA's enforcement powers.
    - Restrictions on unauthorized foreign insurers.
    - Greater clarity in the Treasurer's role in supervisory matters.
  - APRA is consulting on enhancing and harmonizing capital regimes for life and general insurers and on the introduction of Level 3 supervision of financial conglomerates.
- Supervision and resources:
  - The updated regulatory framework has a high level of observance with the ICPs, supported by robust prudential supervision by APRA.
  - APRA's risk-based supervision framework is comprehensive and well-documented, facilitating supervisory risk assessments.
  - APRA has established internal policies and processes to promote prompt and consistent supervisory actions.
  - APRA has adequate supervisory resources and technical capacity to conduct effective supervision; industry participants hold APRA supervisors in high regard.
- ASIC's conduct supervision:
  - There is scope to review effectiveness of regulatory regime and supervisory approach relating to conduct of business by insurers and intermediaries.
  - ASIC has adopted a predominantly desktop approach to supervision given large numbers of licensees and limited resources; supervisory activities are typically triggered by industry intelligence, complaints and breach reports submitted by licensees.
  - Authorities are advised to consider broadening ASIC's legal power to ensure fair treatment of customers, e.g., group-wide market conduct requirements, claims handling practices; servicing of life policies; and requiring insurers to take account of interests of different types of customers during product development.
  - It is critical that ASIC be equipped with adequate supervisory resources, including technical capacity for effective and proactive supervision of insurers' conduct of business.

### Observance with Insurance Core Principles (ICPs) and ongoing matters
- The assessment uses the IAIS ICPs issued in October 2011 as the benchmark; ICP statements, Standards, and Guidance material form the hierarchy.
- The current assessment was conducted from April 30 – May 15, 2012, by Michael Hafeman (external expert engaged by the IMF) and Su Hoong Chang (Senior Financial Sector Expert, IMF).
- The assessment is based solely on laws, regulations and supervisory requirements and practices in place at the time of assessment; ongoing regulatory initiatives (e.g., proposed Level 3 supervision of financial conglomerates and the Life and General Insurance Capital Review (LAGIC)) are noted by way of additional comments.
- Overall conclusion:
  - The updated regulatory framework has a high level of observance with the ICPs, with APRA providing robust prudential supervision.
  - Minor gaps exist in the regulatory regime; APRA seeks to address these through its supervisory process where practicable.
  - Strengthening ASIC's resources and legal powers is recommended to improve oversight of market conduct and consumer protection.

*Source: _cr12312 - Executive Summary*

### 11.      The life insurance industry in Australia is dominated by three groups when

### _cr12312 - 11.      The life insurance industry in Australia is dominated by three groups when

### Market structure and ownership
- The life insurance industry is dominated by three groups (AMP Life Limited, MCL Limited and OnePath Life Limited) when measured by assets; the top three life insurers accounted for 66 percent of the total assets of life insurers as at end-June 2011.
- Of the top 10 life insurance groups, only three had overseas operations (AMP, Colonial and Swiss Re).
- More than 99 percent (weighted average) of their premiums were sourced domestically.
- In terms of ownership, 92 percent of the life industry‘s assets were held by Australian owners, with French owners having a 6 percent interest. The remaining 2 percent ownership stake was distributed between the US, Switzerland, Germany and Hong Kong.
- Further rationalization of multiple licenses held by a number of financial groups was expected in the near term.

### Business mix, products, distribution and trends
- Wealth management products (mainly in the form of unit-linked policies) comprised almost 70 percent of business in 2010/11.
- Life insurers offer superannuation products through statutory funds totaling A$ 38.7 billion as at end-2010 or 3 percent of total superannuation assets.
- Life insurers‘ share of total Australian superannuation assets had fallen from its peak of 44 percent 20 years ago to 15 percent in early 2012.
- Life insurers‘ superannuation assets continued to grow at 6 percent per annum, due largely to investment earnings.
- The four banking groups continue to dominate the Australian wealth management and life insurance markets.
- The merged entity (AMP and AXA Asia Pacific Holdings' Australian and New Zealand business) has A$ 130 billion in funds under management.
- Distribution:
  - Life policies are mainly distributed by independent or aligned advisers.
  - Direct sales (television, internet, etc.) have been growing rapidly in recent years, albeit from a small base.
  - An increasing number of life insurers are offering simple products (low-value funeral plans, etc.) through direct channels, often targeted at the lower social economic demographics; APRA is closely monitoring potential operational and reputational risks.
- Product popularity and demand:
  - Life risk insurance business expanded by 10 percent in 2010.
  - Key products are mainly age-rated guaranteed renewability policies for death, disability covers, etc.
  - Products catering for retirement, e.g., allocated pension (unitized market-linked), have been popular for many years.
  - There is little interest in annuities.

### Major lines of life insurance business (Net Premiums Written, in A$ million; percent domestic risks)
- 2009: Total 41,684
  - Participating: 2,888 (4.7%)
  - Term: 5,540 (19.2%)
  - Annuities: 913 (5.4%)
  - Unit-linked: 31,969 (69.8%)
  - Foreign risks total: 1,156 (0.7% + 0.2% + 0.1% components)
- 2010: Total 38,347
  - Participating: 2,658
  - Term: 6,443
  - Annuities: 1,069
  - Unit-linked: 27,835
  - Foreign risks total: 1,156
- 2011: Total 35,674
  - Participating: 1,668
  - Term: 6,842
  - Annuities: 1,912
  - Unit-linked: 24,911
  - Foreign risks total: 1,182
- Source: APRA

### Assets, investment profile and profitability
- As at end-June 2011:
  - Total life insurers' assets: A$ 230 billion (rose by 1.5 percent from A$ 227 billion to A$ 230 billion).
  - Assets held in equities: A$ 117 billion or 51 percent.
  - Assets held in debt securities: A$ 71 billion or 31 percent.
  - Cash and bank balances: A$ 17.4 billion.
  - High proportion of equity investments largely attributable to life insurers‘ unit-linked policies (ULP) portfolio.
- Profitability:
  - Profitability stabilized at a level achieved prior to the 2008/09 global financial crisis, driven largely by investment earnings on reserves and retained profits for non-investment-linked business.
  - Aggregate claims experience had deteriorated recently but appeared insurer-specific rather than widespread.
  - Profits from pricing margins for group and wholesale business have been eroding due to intensifying competition and stronger bargaining power of increasingly-large industry superannuation funds.

### Capital adequacy, technical provisions and key metrics
- Overall capital adequacy coverage ratio for the life insurance industry was 142 percent as at end-June 2011 (slight decrease from 149 percent as at end-2009/10).
- Aggregate technical provisions (TP) maintained by life insurers: A$ 201.8 billion, accounting for 88 percent of total liabilities.
- Total shareholders‘ funds: A$ 16.2 billion.

### Key risks and regulatory/strategic responses for life insurers
- Key risks: depressed financial markets, inadequate pricing, and strategic risks.
- Concerns over sustainability of pricing for large group risk schemes given reductions in premiums and generous profit sharing arrangements.
- Life insurers reviewing strategies, business models and practices to prepare for policy and legislative changes, e.g., government policies on financial advice (and remuneration), superannuation reforms and proposed changes in prudential standards (enhanced/harmonised capital regime).
- Potential insurer responses: refocus strategies, capital management, governance, compliance, distribution channels and required competence.
- Move to greater use of direct marketing channels may pose underwriting and pricing risks.

### General insurance industry: structure, lines, assets and capital
- High concentration in personal lines: top three insurers accounted for about 75 percent of earned premiums in 2010/11.
- Commercial lines are more diversified; most commercial lines placed through brokers while personal lines mainly sold by direct marketing channels.
- QBE Insurance had a significant share of operations overseas, which represented more than two-thirds of its premiums for 2010/2011 and assets as at end-June 2011.
- Major lines of general insurance business (Gross Premiums written, in A$ million):
  - 2009: Total 29,960
    - Motor: 7,780 (26.1%)
    - Property: 7,758 (27.5%)
    - Liabilities: 6,828 (22.8%)
    - Accident and health: 947 (3.1%)
    - Others: 5,490 (16.9%)
    - Foreign risks total: 1,156 (3.7%)
  - 2010: Total 31,304
    - Motor: 8,339
    - Property: 8,472
    - Liabilities: 7,262
    - Accident and health: 968
    - Others: 5,106
    - Foreign risks total: 1,156
  - 2011: Total 32,348
    - Motor: 8,433
    - Property: 8,883
    - Liabilities: 7,374
    - Accident and health: 1,013
    - Others: 5,463
    - Foreign risks total: 1,182
  - Source: APRA
- As at end-June 2011:
  - Total assets of general insurers: A$ 100 billion (rose 14 percent).
  - Government securities: A$ 12.7 billion.
  - Corporate securities (mainly in banks): A$ 17.6 billion.
  - Reinsurance recoverables: A$ 15.2 billion (more than 90 percent due from reinsurers rated A or above).
  - Cash and bank balances: A$ 1.7 billion.
  - Intra-group receivables: A$ 4 billion.
- Profitability and catastrophe impacts:
  - Despite natural disasters in 2010/11, general insurers reported profits, albeit at a lower level.
  - Gross losses from the Christchurch earthquake were estimated at A$ 11.2 billion.
  - The gross losses arising from the March 2010 Melbourne and Perth storms and December 2010 Queensland floods were estimated at A$ 42.6 billion by the Insurance Council of Australia.
  - Higher claims led reinsurers to raise renewal rates and some reinsurers became reluctant to write lower layers of catastrophe cover or offer aggregate reinsurance programs, causing some insurers to retain higher catastrophe risks.
  - Insurers increased TP for long-tail claims due to decline in risk-free interest rates used to discount liabilities; small underwriting loss mitigated by higher valuation gains from duration-matched assets.
- Capitalization:
  - General insurance industry held capital resources equivalent to 175 percent of the minimum capital requirement as at end-June 2011 (slight decrease from 191 percent as at end-June 2010).
  - TP increased from A$ 51.9 billion to A$ 64.8 billion (65 percent of total liabilities).
  - Aggregate shareholders‘ funds: A$ 25.1 billion (A$ 25.9 billion as at end-June 2010).
  - Intra-group liabilities: A$ 4.3 billion or 17 percent of shareholders‘ funds.

### Key risks and regulatory expectations for general insurers
- Key risks: exposures to catastrophic events and counterparty risks from reinsurance programs.
- APRA expects insurers to enhance stress testing, including scenarios with potential increases in reinsurance rates and severe reduction in reinsurance capacity.
- The Natural Disaster Insurance Review (final report released November 2011) recommended:
  - Requiring insurers to provide flood cover as standard in home building and contents policies.
  - A government agency to coordinate national flood risk management, including flood mapping.
- Proposed review and harmonization of capital standards for life and general insurers may have significant implications for some general insurers.

### Reinsurance market
- APRA-authorized reinsurance operations in Australia are small.
- Top three general reinsurers by gross earned premiums: Munich Re, Swiss Re and Hannover Re (operate in Australia through branches).
- General Re is the only APRA-authorized general reinsurer that is locally incorporated.
- Top three APRA-authorized life reinsurers: Swiss Re, Munich Re and RGA Reinsurance Company (operate through locally-incorporated companies).
- Net premiums of life reinsurers: A$ 1.6 billion in 2010/11 (increase of 12 percent from 2009/10).
- APRA-authorized general reinsurers wrote about A$ 1.5 billion (marginal increase from 2009/10).
- Reinsurance premiums in respect of life business hovered around A$ 1.5 billion for the past three years; reinsurance premiums for general business were about A$ 1.4 billion for the same period.
- A new life reinsurer (SCOR Re) was admitted into the life insurance market in Australia.

### Institutional framework and crisis coordination
- Australia adopts a functional regulatory structure:
  - APRA: prudential regulation of ADIs, life and general insurers (including reinsurers) and most of the superannuation industry.
  - ASIC: market conduct regulation and supervision, promoting market integrity and consumer protection across the financial services sector.
  - RBA: monetary policy, overseeing financial system stability and the payments system.
- The Treasury advises the Australian Government on the framework for financial sector regulation, exercise of the Treasurer‘s powers, and broader economic and fiscal implications of developments that pose threats to system stability.
- The Council of Financial Regulators (CFR) serves as a coordination forum for APRA, ASIC, RBA and Treasury; it is a non-statutory body chaired by the Governor of the RBA and plays an active role in reviewing global market conditions, coordinating advice to the Government and enhancing crisis management arrangements.
- Inter-agency cooperation mechanisms include overlapping board representation, bilateral MoUs, regular bilateral coordination arrangements (e.g., RBA-APRA Coordination Committee meeting approximately every six weeks), and legislation allowing APRA and the RBA to share institution-level data.
- Crisis management:
  - APRA is the lead resolution authority as the prudential supervisor.
  - Enhancements in the last five years include strengthening APRA‘s statutory powers, formalizing CFR coordination arrangements, implementing the Financial Claims Scheme, developing crisis resolution strategies for ADIs, conducting ADI crisis simulation exercises, and operationalizing cross-border crisis resolution coordination arrangements with New Zealand counterparts.

*Source: IMF staff report content provided in the unit*

### 33.      APRA has embarked on two major regulatory initiatives in 2011/12: to enhance

### APRA has embarked on two major regulatory initiatives in 2011/12: to enhance

### APRA regulatory initiatives (2011/12)
- APRA has embarked on two major regulatory initiatives in 2011/12: to enhance the solvency regimes for insurers and formalize conglomerate supervision.
- One initiative is an updating and harmonization (where appropriate) of capital requirements for general and life insurers, including enhancing the risk-sensitivity of the capital framework.
- APRA expects to release the final revised capital standards in May 2012, with an effective date of 1 January 2013.
- APRA has also issued a consultation paper on the development of a prudential framework for conglomerate groups, referred to as Level 3 Supervision.

### Regulation of private health insurance
- The regulation of private health insurance in Australia is primarily conducted under the Private Health Insurance Act 2007 (PHIA) and by the Private Health Insurance Administration Council (PHIAC) in relation to prudential supervision.
- PHIAC has close links with APRA.
- Private Health Insurance is an intrinsic element of Australia‘s overall health system and is community rated, and not underwritten by health status.
- A risk-equalization trust fund is maintained in the sector to make up for the lack of underwriting.
- The Private Health Insurance Ombudsman deals with consumers‘ complaints, health service provider and insurer contracting arrangements, and the conduct of agents and brokers.
- The Department of Health and Ageing also has regulatory powers, and focuses on pricing and product features.
- Other regulators with a role in the regulation of private health insurance include:
  - the Australian Competition and Consumer Commission (ACCC), which considers any competition issues (in consultation with PHIAC); and
  - ASIC, in relation to the operation of the corporate entities.

### Preconditions for Effective Insurance Supervision — Sound and Sustainable Macroeconomic and Financial Sector Policies
- The macroeconomic and fiscal policy framework in Australia is well established.
- The Charter of Budget Honesty Act 1998 requires the Government to clearly and regularly outline its fiscal strategy and report on its fiscal objectives and expected outcomes.
- After taking fiscal measures to support the Australian economy during the global financial crisis, the Government‘s current fiscal strategy is aimed at achieving a budget surplus in 2012/13.
- The RBA has established procedures to ensure transparency and accountability of its monetary policies and has committed to keeping the average inflation rate at between two and three percent.

### Best practice regulation and oversight
- Regulatory proposals of APRA and ASIC must comply with the Government’s policy on best practice regulation.
- The Office of Best Practice Regulation (OBPR) is part of the Deregulation Policy Division (DPD) of the Department of Finance and Deregulation.
- The OBPR promotes the Government‘s objective of improving the effectiveness and efficiency of regulation.
- The DPD assists the Ministers responsible for deregulation through providing policy advice and support to reform poorly-performing government operations and regulations.
- The OBPR reports to the government annually on the compliance of various agencies, including APRA and ASIC, with the best regulation policies.
- The OBPR has consistently found both APRA and ASIC to be compliant with the policy on best practice regulation.

### Legal system and public infrastructure
- The legal system in Australia is highly developed and the independence of the judiciary is respected.
- There is a comprehensive body of business laws, including those governing insolvency as well as contractual and property rights.
- All legislation must be passed by the two houses of the Federal Parliament, i.e., the Senate and the House of Representatives.
- There is a strict separation between the judiciary, the Parliament and Executive Government.
- The Australian courts uphold the principle of judicial independence, which ensures that judges are free from legislative and/or executive interference in performing their judicial functions.
- The High Court is the final court of appeal.

### Accounting, auditing, and financial reporting framework
- Accounting and auditing standards adopted in Australia are in line with international best practices.
- Accounting standards in Australia are made by the Australian Accounting Standards Board (AASB).
- The AASB is involved in the International Accounting Standards Board‘s standard-setting process.
- The AASB issues the Australian-equivalent of the International Financial Reporting Standards (IFRS), which apply to Australian companies with the force of law.
- The Auditing and Assurance Standards Board (AUASB) establishes Australian auditing standards based on the International Standards on Auditing issued by the International Auditing and Assurance Standards Board.
- The Financial Reporting Council is responsible for overseeing the effectiveness of the financial reporting and auditing frameworks in Australia and oversees the activities of AASB and AUASB.
- Auditors must meet the registration requirements of ASIC and there are currently about 5,200 registered company auditors in Australia.

### Actuarial profession
- The Institute of Actuaries of Australia (IAAust) enforces professional and ethical standards of its members.
- It has 1,842 Fellow, 831 Associate and 1,060 student members as at May 2012.
- One-quarter of its members are based outside of Australia, including in New Zealand and Asian countries.
- Fellow members are fully qualified to sign actuarial reports required by APRA.
- The IAAust has established a Code of Professional Conduct to maintain the quality, integrity, and professional standards of practicing actuaries and has established an internal disciplinary process to enforce the Code and its professional standards.
- Since 2006, the IAAust publishes disciplinary action taken on its website.
- On average, there are about two new legitimate complaints annually, mostly relating to technical issues. Some of the complaints were referred by APRA.

### APRA data and statistical publications
- APRA is the central repository of statistical information on the Australian financial sector.
- APRA supervisors have timely access to financial statistics from a wide range of financial institutions, both regulated and unregulated, as part of their supervisory assessments at entity, industry and cross-sectoral levels.
- Around 80 percent of APRA's data collections are shared with or collected on behalf of other agencies, in particular the RBA and the Australian Bureau of Statistics.
- APRA produces 13 statistical publications, which provide regular updates on the financial performance of APRA-regulated industries.

### Corporate governance
- Australia’s corporate governance system complies with the Organization for Economic Cooperation and Development’s Principles of Corporate Governance.
- ASIC is responsible for monitoring and enforcing compliance with the corporate governance requirements in the Corporations Act 2001 (CA).
- Companies that are prudentially regulated by APRA are subject to additional corporate governance requirements set out in APRA‘s prudential standards.

### Consumer protection and dispute resolution
- The consumer protection regime in Australia is supported by three pillars: licensing of financial product advisers; continuous disclosure requirements; and access to dispute resolution mechanisms.
- Anyone who conducts financial services business in Australia or sells financial products must possess an Australian Financial Services License (AFSL) issued by ASIC.
- The CA and the Australian Securities and Investments Commission Act 2001 (ASIC Act) regulate consumer protection in relation to financial products.
- Consumers of financial services have a number of options for resolving disputes without going to a court or tribunal, including mediation, conciliation, conferencing, neutral evaluation, and arbitration.
- ASIC requires licensed entities to have internal and external dispute resolution mechanisms. The policy is to encourage alternative dispute resolution before commencing court proceedings.
- The Civil Dispute Resolution Act 2011 and the Financial Ombudsman Service (FOS) provides a framework for resolving disputes with financial service providers at no cost to the consumers.
- Both domestic and international arbitral awards can be enforced in Australia.
- Australia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

### Financial markets (partial)
- The financial markets in Australia offer a broad range of instruments that facilitate insurers’ asset-liability management.
- The 2,222 companies listed on the Australian Securities Exchange (ASX) had a combined market capitalization of A$

*Source: _cr12312 - 33.      APRA has embarked on two major regulatory initiatives in 2011/12: to enhance*

### 1.17 trillion as at end-2011. The ASX has an average daily turnover of around

### _cr12312 - 1.17 trillion as at end-2011. The ASX has an average daily turnover of around

### Market structure and key statistics
- Market size: 1.17 trillion as at end-2011.
- ASX average daily turnover: A$ 5 billion.
- Over-the-counter market turnover: A$80 trillion in financial year (FY) 2010/11.
- Corporate bond turnover: A$    900 billion in FY 2010/11.
- The RBA regulates the payments system and provides oversight of the stability of clearing and settlement facilities.
- The Competition and Consumer Act 2010 covers consumer protection non-financial products and exclude consumer credit.

### Regulatory framework and supervisory responsibilities
- Insurance supervision responsibilities are shared among a number of authorities with clearly-defined mandates and objectives, notably APRA and ASIC.
- RBA: regulation of payments system and oversight of clearing and settlement facility stability.
- APRA: prudential supervisor with licensing authority under the IA and LIA; conducts risk-based supervision anchored on PAIRS and SOARS.
- ASIC: conduct-of-business supervisor with responsibilities for AFSL holders and intermediaries; limited powers on disclosure beyond the CA and accounting standards.
- Funding and independence concerns:
  - APRA and ASIC dependent on Government approval for funding.
  - A significant amount of ASIC‟s funding is non-core funding earmarked for specific projects; the relative share of non-core funding has been increasing with the budget for 2012-13 continuing this trend.
  - Ministerial powers exist (policy directions and certain supervisory decisions) and their existence raises concerns about potential adverse effects on supervisory policy.

### ICP compliance: aggregate observance levels
- Observed (O): 14
- Largely observed (LO): 9
- Partly observed (PO): 3
- Not Observed (NO): 0
- Total: 26

### Selected findings by ICP (levels preserved as in source)
- ICP 1 (Objectives, Powers and Responsibilities of the Supervisor): LO — responsibilities shared; instances where weak powers could compromise objectives (e.g., ASIC cannot impose disclosure beyond CA/accounting standards; APRA has not issued disclosure standards other than on capital adequacy).
- ICP 2 (Supervisor): PO — concerns on operational independence, accountability, transparency and adequacy of resources for APRA and ASIC; Ministerial powers and funding dependencies noted.
- ICP 3 (Information Exchange and Confidentiality Requirements): O — APRA empowered to obtain and exchange information; signatory to bilateral MoUs and IAIS Multilateral MoU; effectiveness could be enhanced by clearer internal policies on notifying other supervisors in advance of action.
- ICP 4 (Licensing): O — APRA licensing authority under IA and LIA; clear procedures; register maintained.
- ICP 5 (Suitability of Persons): LO — APRA requires fit and proper criteria; no explicit requirement for insurers to notify APRA of circumstances materially adversely affecting significant owners; merits in clarifying “responsible persons” scope.
- ICP 6 (Changes in Control and Portfolio Transfers): LO — FSSA sets ownership/control thresholds; Treasurer or APRA empowered to approve significant ownership changes; insurers not explicitly required to notify APRA of significant decreases below control levels.
- ICP 7 (Corporate Governance): O — extensive requirements, scope to enhance to reflect international best practices; only listed insurers required to disclose comprehensive governance information.
- ICP 8 (Risk Management and Internal Controls): O — APRA emphasis on risk management; some insurers sophisticated; suggestion in some jurisdictions to require a designated compliance officer.
- ICP 9 (Supervisory Review and Reporting): LO — APRA risk-based framework (PAIRS and SOARS); extensive data collection; ASIC predominantly desktop reviews for conduct supervision with limited proactive resources.
- ICP 10 (Preventive and Corrective Measures): O — SOARS supports escalation; APRA wide powers; unauthorized life insurance business not explicitly an offence under LIA but addressed indirectly.
- ICP 11 (Enforcement): O — APRA powers expanded in 2008; enforcement guided by an Enforcement Manual; dedicated Enforcement Unit; limited enforcement against life insurers since 2006.
- ICP 12 (Winding-up and Exit from the Market): LO — APRA powers for timely intervention; no formal requirement that general insurer policy liabilities rank ahead of unsecured creditors; Policyholder Compensation Facility and statutory fund rules provide protection.
- ICP 13 (Reinsurance and Other Forms of Risk Transfer): O — strong reinsurance coverage essential due to natural catastrophe exposure; APRA reviews reinsurance strategies.
- ICP 14 (Valuation): O — risk margins for general insurance calculated to meet specified uncertainty; life insurance risk margins based on specified assumptions and selectable ranges.
- ICP 15 (Investment): O — broad investment choice for insurers; qualitative principles-based requirements; supervisory adverse treatment for risky/concentrated investments; suggestion that additional quantitative restrictions might be useful.
- ICP 16 (Enterprise Risk Management for Solvency Purposes): LO — enterprise risk management evolving; LAGIC project intended to strengthen framework.
- ICP 17 (Capital Adequacy): LO — insurers required to establish solvency control levels agreed with APRA; lack of transparency and consistency in solvency control levels noted.
- ICP 18 (Intermediaries): O — mature regime; ASIC licensing guides and regulatory guides; supervision reactive due to limited resources.
- ICP 19 (Conduct of Business): PO — high-level principles exist but need clearer regulatory guidance and strengthened minimum training/competency standards; ASIC gaps in authority to supervise claims practices and policy servicing; ASIC resource constraints noted for supervising about 1,560 AFSL holders.
- ICP 20 (Public Disclosure): PO — disclosure requirements have not kept pace with IAIS 2011 revisions; many disclosure items only required of listed insurers; ASIC lacks power to impose additional disclosure; APRA has not issued disclosure standards beyond capital adequacy.
- ICP 21 (Countering Fraud in Insurance): O — fraud is illegal; APRA assesses fraud risk frameworks; ASIC may undertake surveillance visits; cooperation between APRA and ASIC.
- ICP 22 (AML/CFT): O — APRA and ASIC aware of ML/TF risks; FATF standards apply to underwriting and placement of life insurance; general insurance subject to the FTR Act but not to AML/CTF Act comprehensive requirements.
- ICP 23 (Group-wide Supervision): LO — effective Level 2 framework for general insurance groups; equivalent Level 2 for life insurers not developed but to be largely addressed by impending Level 3 supervision of financial conglomerates; ASIC supervision of market conduct is at legal entity level only.
- ICP 24 (Macroprudential Surveillance and Insurance Supervision): O — APRA has comprehensive processes and tools; plans to increase stress testing.
- ICP 25 (Supervisory Cooperation and Coordination): O — APRA coordination domestically and internationally; formalised bilateral and joint MoUs; coordination with RBNZ for significant NZ operations.
- ICP 26 (Cross-border Cooperation and Coordination on Crisis Management): LO — APRA effective working relationships with foreign supervisors; no requirement for insurers to maintain recovery or resolution plans.

### Key recommendations (preserved wording and numbering where given)
- ICP 1:
  - Legislation should be amended to give ASIC the power to make rules, which will help to close gaps in the current regulatory framework for conduct of business.
- ICP 2:
  - a) Eliminate or further restrict the ability of the Minister to give directions to APRA and ASIC on matters of supervisory policy;
  - b) Eliminate or further restrict the involvement of the Minister in decisions related to individual regulated entities or individuals; and
  - c) Consider the various possibilities to arrange the funding of APRA and ASIC in such a manner that will ensure they will have the resources needed to respond to the current and emerging supervisory challenges.
- ICP 5:
  - a) requiring insurers to notify APRA of any circumstances that may materially adversely affect the suitability of significant owners; and
  - b) separating “Key Persons in Control Functions” from the definition of “senior manager” under “responsible persons”.
- ICP 6:
  - Insurers should be required to notify APRA on any significant decrease in the ownership by a person(s) below the pre-determined control level approved by the Minister.
- ICP 7:
  - Amend requirements to more explicitly indicate the responsibility of Boards to maintain and enforce policies to deal with conflicts of interest.
  - All insurers should be required to disclose their governance practices in their annual reports.
- ICP 8:
  - APRA should consider requiring each insurer to designate an officer with overall responsibility for compliance.
- ICP 9:
  - a) review the effectiveness of ASIC‟s current predominantly desktop approach to supervising insurers‟ conduct of business;
  - b) empower ASIC to inspect service providers of outsourced functions by insurers; and
  - c) ensure that ASIC is equipped with adequate supervisory resources including the technical capacity for effective and proactive supervision of insurers‟ conduct of business.
- ICP 11:
  - Maintain momentum for on-going review on harmonising the powers of APRA across financial sectors (noting differences remain, e.g., lack of power to revoke the license of a life insurer directly).
- ICP 12:
  - Consider providing for the legal priority of claims by policyholders of general insurers over unsecured creditors, and greater legal priority of life policyholders‟ claims to the assets of other statutory funds, ahead of unsecured creditors.
- ICP 14:
  - APRA should consider specifying the level of uncertainty to be provided for by the risk margins in life insurance liabilities.
- ICP 15:
  - APRA should consider the establishment of additional quantitative restrictions (e.g., on large exposures, investments with related parties, more-complex and less-transparent classes of assets, and investments in markets or instruments that are subject to less governance or regulation).
  - APRA should also formally extend its supervision to life insurance groups, which would include relevant investment requirements.
- ICP 16:
  - Whether through LAGIC or otherwise, APRA should enhance the requirements on enterprise risk management, including explicit description of relationships between risk tolerance limits, regulatory capital requirements, economic capital, and monitoring processes; require documentation of approaches to measuring risks and establishment of quantitative and qualitative risk tolerance levels; and provide more explicit guidance on own risk and solvency assessments.
- ICP 17:
  - APRA should take steps to increase the transparency and ensure the consistency of the solvency control levels.
- ICP 19:
  - a) implementing the enhanced training and competencies standards proposed by ASIC;
  - b) requiring insurance intermediaries to ensure the privacy protection of customers;
  - c) empowering ASIC to establish or enforce regulatory requirements to ensure fair treatment of customers and product development; and
  - d) ensuring that ASIC is adequately resourced to conduct proactive supervision to prevent misconduct.
- ICP 20:
  - APRA and ASIC should cooperate to identify and deal with shortcomings in disclosure requirements, including:
    - a) the exemption of small and unlisted insurers from many disclosure requirements;
    - b) the limited detail disclosed on the capital adequacy of life insurers;
    - c) the need for disclosure of an analysis of sources of earnings; and
    - d) the need for comprehensive disclosures on corporate governance, risks and risk management.
  - Authorities should consider requiring all insurers to make their audited financial statements and required disclosures available to the public at no cost.
- ICP 21:
  - ASIC might further strengthen its oversight of the fraud controls of AFSL holders by adopting a more proactive inspection program.
- ICP 22:
  - Authorities should periodically reconsider whether or not general insurance should be subject to the more comprehensive requirements prescribed by the AML/CTF Act.
- ICP 23:
  - The impending introduction of Level 3 supervision of financial conglomerates will formalise group regulatory requirements for life insurers. Authorities should incorporate group-wide market conduct requirements in both Level 2 and Level 3 supervision frameworks.
- ICP 26:
  - Authorities should implement the requirement for insurers to establish and maintain contingency plans and procedures for use in a going- and gone- concern situation.

*Source: IMF staff assessment content provided in the supplied PDF excerpt.*

### 45.      The Australian authorities wish to express their appreciation to the IMF and its

### _cr12312 - 45.      The Australian authorities wish to express their appreciation to the IMF and its

### Authorities' appreciation and commitment
- Paragraph 45: "The Australian authorities wish to express their appreciation to the IMF and its assessment teams for their assessment."
- Australia is "strongly committed to the FSAP process and the insights that the FSAP provides into a country‘s financial sector."
- Australia "acknowledges that it is important to continually review and seek to improve the regulatory framework and supervision practices."

### Agreement and points of contention with FSAP findings
- Paragraph 46: The Australian authorities "share the view expressed in the report that Australia has a high level of observance with the Insurance Core Principles, supported by robust supervision by APRA."
- The authorities note "there are, however, some areas where the Australian authorities disagree with the assessment or do not consider that the recommendations will necessarily support better regulatory outcomes."

*Source: _cr12312 - 45.      The Australian authorities wish to express their appreciation to the IMF and its*

### 47.      The Australian authorities consider that there are some principles for which the

### The Australian authorities consider that there are some principles for which the

### Areas of disagreement with the assessment (Core Principles)
- CP 17 Capital adequacy
  - Australian authorities strongly disagree with the assessment that rates Australia "Largely Observed" on the basis that solvency control levels are not transparent or consistent.
  - APRA sets robust capital requirements under a consistent and transparent framework.
  - APRA sets a relatively high level for the Minimum Capital Requirement (MCR), supplemented by a Prescribed Capital Requirement (PCR) determined separately for each insurer based on its risk profile.
  - Australian authorities argue a simple relationship between control levels is not appropriate given the complex nature of insurance and variety of insurance businesses.
  - APRA intends to retain this approach under the new regulatory capital framework for general and life insurers effective from January 1, 2013.

- CP 2 The supervisor
  - Concerns about the rationale for ratings on operational independence, accountability, transparency and adequacy of resources.
  - Authorities consider the assessment overstates impacts on regulator independence and focuses unduly on process rather than outcomes.
  - APRA and ASIC are established as statutory authorities at arm’s length from Government with substantial statutory and operational independence.

- CP 20 Public disclosure
  - Authorities accept the assessment but re-emphasize existing significant public disclosure obligations under the Corporations Act and Australian accounting standards.
  - Specific accounting standards for listed and unlisted life insurers and general insurers impose disclosure requirements for financial results, capital and liability valuation that go beyond IFRS requirements in many jurisdictions.
  - Listed insurers have additional continuous disclosure and governance disclosure obligations.
  - Authorities acknowledge disclosure obligations of unlisted insurers could be brought into line with international standards and will consider how to achieve this.

- CP 19 Conduct of Business
  - Authorities accept some findings but believe insufficient weight given to existing Corporations Act and Insurance Contracts Act provisions protecting fair treatment of customers.
  - Implementation of recommendations for supervision of insurers and intermediaries will require further funding and resources; approach to supervision will be reviewed in light of future funding decisions.

- CP 5 Suitability of persons and CP 6 Changes in Control and Portfolio Transfers
  - Assessment recommends notification requirements for circumstances materially adversely affecting suitability of significant owners and significant decreases in ownership below control levels.
  - Authorities accept recommendations but note no evidence absence of such notification requirements has led to adverse prudential outcomes in Australia.

- CP 26 Cross-border cooperation and coordination on crisis management
  - Assessment recommends contingency planning requirements for going- and gone-concern situations.
  - APRA is considering possible scope and nature of recovery planning requirements for insurers.
  - Insurers will be required to maintain Internal Capital Adequacy Assessment Processes (ICAAPs) under changes to come into effect on 1 January 2013, which involve a degree of contingency planning.

- CP 22 Anti-Money Laundering and Combating the Financing of Terrorism
  - Assessment suggests reconsidering whether general insurance should be subject to more comprehensive AML/CTF Act requirements.
  - Australia undertook a 2011 national threat assessment on money laundering that did not reveal money laundering through general insurance to be a threat.
  - Organized crime threat assessments over recent years did not find money laundering through general insurance to present a threat.
  - Australia will continue to monitor the environment and, if necessary, develop legislative responses.

### II. Detailed principle-by-principle assessment — institutional overview and ICP 1 (Objectives, Powers and Responsibilities of the Supervisor)
- Responsible authorities and scope
  - APRA: prudential regulation and supervision of general and life insurance companies, banking, and parts of superannuation.
  - ASIC: monitoring, regulating, and enforcing corporations and financial services laws; market integrity and consumer protection across financial services, including insurers.
  - PHIAC: regulation of the private health insurance industry; APRA regulates non-health benefit fund business of companies conducting both health and other insurance business.
  - Some state-level authorities supervise certain activities (e.g., motor third-party liability insurance).

- Primary legislation defining APRA authority (list preserved verbatim)
  - Australian Prudential Regulation Authority Act 1998 (APRA Act);
  - Insurance Act 1973 (IA);
  - Life Insurance Act 1995 (LIA);
  - Insurance Acquisitions and Takeovers Act 1991 (IATA);
  - Medical Indemnity (Prudential Supervision and Product Standards) Act 2003;
  - Financial Sector (Shareholdings) Act 1998 (FSSA);
  - Financial Sector (Business Transfer and Group Restructure) Act 1999;
  - Financial Sector (Collection of Data) Act 2001 (FSCODA);
  - Financial Sector (Collection of Data-Consequential and Transitional Provisions) Act 2001;
  - General Insurance Supervisory Levy Imposition Act 1998;
  - Life Insurance Supervisory Levy Imposition Act 1998; and
  - Financial Institutions Supervision Levies Collection Act 1998.

- Primary legislation defining ASIC authority (list preserved verbatim)
  - Australian Securities and Investments Commission Act 2001 (ASIC Act);
  - Corporations Act 2001 (CA);
  - Insurance Contracts Act 1984 (ICA);
  - LIA; and
  - Medical Indemnity (Prudential Supervision and Product Standards) Act 2003.

- PHIAC authority: Private Health Insurance Act 2007 (PHIA).

- Principal objectives of supervision
  - Maintain a fair, safe and stable insurance sector for benefit/protection of policyholders.
  - APRA Act requires balancing financial safety and efficiency, competition, contestability and competitive neutrality and promoting financial system stability.
  - IA and LIA emphasise protection of policyholders consistent with continued development of a viable, competitive and innovative insurance industry.
  - ASIC Act: monitor and promote market integrity and consumer protection.
  - PHIA: balance efficient competitive health insurance industry, consumer protection, and prudential safety.

- Powers and differences among authorities
  - APRA can issue prudential standards with force of law; enforce rules administratively; limited autonomous fining power (breaches of FSCODA); can seek fines through DPP and Courts.
  - ASIC cannot issue rules but can impose fines.
  - PHIAC can issue rules but has limited group-wide supervisory powers.

- Coordination and law reform
  - Treasury advises Government on legislative framework; APRA collaborates with Treasury on legislative conflicts and amendments.
  - Major reforms in 2001; amendments in 2008 and 2010.
  - Council of Financial Regulators (CFR) (RBA Chair, APRA, ASIC, Treasury) coordinates significant reforms.

- Assessment: Largely observed.

- Commented gap: Legislation should be amended to give ASIC the power to make rules to close regulatory gaps for conduct of business.

### ICP 2 Supervisor — governance, independence, transparency, and accountability
- Internal governance (APRA)
  - Commission-style Executive Group of between three and five APRA Members; currently there are three Members.
  - Executive Group meets formally monthly; Management Group meets at least weekly.
  - Documented procedures for formal decisions; identified accountable officers for decisions and actions.
  - Delegations (internal and Treasurer delegations under FSSA and IATA) ensure senior sign-off and escalation.
  - Risk Management and Audit Committee includes one Member and two persons appointed by the Treasurer; annual audit plan; Risk Management and Internal Audit unit conducts reviews.

- Internal governance (ASIC)
  - Corporate Governance Charter, policies and workflows for enforcement and licensing; documentation guiding day-to-day work.
  - ASIC provides written reasons where review rights exist; normally provides reasons even when not statutorily required.
  - Internal audits via ASIC’s Audit, Assurance and Compliance Unit.

- Appointment and dismissal
  - APRA Members appointed by Governor-General on Minister advice; term cannot exceed five years; power of termination vested in Governor-General.
  - No APRA Member has ever been terminated.
  - ASIC Commissioners appointed by Governor-General on Minister nomination; term up to five years and eligible for reappointment; grounds for termination include misbehavior, physical or mental incapacity and bankruptcy (s9, s108 and s111 of ASIC Act).

- Institutional relationships and ministerial directions
  - APRA is independent but subject to formal written directions by the Minister on policies or priorities; directions must be tabled in Parliament within 15 sitting days and published in the Gazette. No instances of formal direction under APRA Act.
  - ASIC may be given written directions by the Minister on policies/priorities; directions must be published in the Gazette within 21 days and tabled in both Houses within 15 sitting days (s12 ASIC Act). Minister prevented from directing on particular cases but can direct investigations in the public interest.
  - Statement of Expectations to ASIC issued in February 2007; Minister’s 2007 Statement limited use of directions to rare exceptional circumstances; one known direction in 1992.

- Accountability mechanisms
  - APRA: Parliamentary Standing Committee reviews; Senate Estimates hearings; ANAO financial and performance audits; Annual Report including audited financial statements and transition matrices for SOARS; does not publicly identify troubled insurers for confidentiality/systemic risk reasons.
  - ASIC: Annual report tabled in Parliament; appears before Joint Parliamentary Committee on Corporations and Financial Services; twice-yearly appearance before Senate Estimates.

- Independence and funding arrangements
  - APRA:
    - APRA Act permits APRA to do anything necessary/convenient to perform functions while remaining accountable to Minister and Parliament.
    - Budget proposed by APRA Members; endorsement by Government not guaranteed.
    - Funded primarily from annual levies collected from supervised entities, with contributions from interest earnings, fees for services and miscellaneous cost offsets.
    - Levy rates determined by Government after consultation; calculated by reference to assets subject to minimum and maximum per institution (NOHCs levied at flat rate).
    - Has received Special Appropriations at times (e.g., additional funding to deal with the global financial crisis).
    - From 1 July 2007 APRA moved from CAC Act to FMA Act financial arrangements.
    - Subject to Department of Finance and Deregulation scrutiny, whole-of-government procurement/cost initiatives, staff enterprise agreement vetting, and efficiency dividend requirements.
    - APRA has discretion to allocate its financial and human resources and autonomy in staffing.

  - ASIC:
    - Covered by FMA Act; funded by Parliamentary appropriation from Consolidated Revenue Fund.
    - Fees and charges collected are returned to the Consolidated Revenue Fund.
    - Portion of funding is non-core (earmarked for new policy proposals and special projects); in 2011-12 non-core funding accounted for 18.7 percent of ASIC’s funding.
    - ASIC largely specifies operational allocation of core funding but, in practice, does not repurpose earmarked non-core funds.

- Transparency of requirements and procedures
  - APRA publishes prudential standards, prudential practice guides, licensing and reporting procedures, and supervisory frameworks (PAIRS and SOARS; Supervision Framework) on its website.
  - APRA informs insurers of PAIRS ratings and proposed supervisory actions; issues response papers following consultation when controversial.
  - Regulation Impact Statement (RIS) required for significant regulatory proposals; prepared after external consultation.
  - APRA consulted publicly on supervisory procedure changes and published open/closed consultations.

  - ASIC publishes policies that guide statutory interpretation and decision-making; uses consultation (roundtables, Consumer Advisory Panel, External Advisory Panel, regional liaison committees); prepares RIS reviewed by OBPR; uses media releases to disclose regulatory actions.

- Information and publications
  - APRA publishes industry-based statistical publications on financial strength and performance of general and life insurance industries; maintains website; issues press statements and speeches; Annual Report includes enforcement action statistics and SOARS transition matrices.
  - ASIC publishes annual report, audited accounts, and information on regulatory actions on its website.

- Appeal against supervisory decisions
  - Most APRA administrative decisions under IA and LIA are subject to judicial review under the ADJR Act; certain Financial Claims Scheme (FCS) decisions excluded.
  - Some APRA decisions are subject to merits review; reconsideration required upon request; AAT may review merits; appeal to Federal Court on questions of law.
  - ASIC decisions generally subject to judicial review and merits review by AAT; some regulatory decisions not subject to merits review; Commonwealth Ombudsman can review ASIC actions and make recommendations (no power to change ASIC decisions).

- Confidentiality and legal protections
  - APRA: legislation protects information with penalties for wrongful disclosure; offence for disclosure of protected information with imprisonment up to two years; Security Framework and procedures to ensure secrecy provisions known to staff and partners.
  - ASIC: use, collection and protection of information governed by Commonwealth Acts and Regulations; staff must acknowledge awareness; Privacy Act applies; breaches may constitute breach of APS Values/Code of Conduct and could be punishable by imprisonment for up to two years (s127(1) ASIC Act and s70 Crimes Act).

*Source: _cr12312 - 47.*

### Section 58 of the APRA Act protects APRA and its staff from any liability for any act

### _cr12312 - Section 58 of the APRA Act protects APRA and its staff from any liability for any act

### Legal protections for APRA and ASIC staff
- Section 58 of the APRA Act protects APRA and its staff from any liability for any act or omission where they act in good faith.
- APRA staff legal cost protection:
  - Legal Services Directions 2005 (LSD) (Attorney General, s55ZF Judiciary Act 1903) provides framework for assistance with legal costs (Appendix E).
  - Expenditure to cover legal costs of an employee should normally be approved to assist an employee who is a defendant in civil or criminal proceedings if:
    - a) the proceedings arose out of an incident that relates to their employment with the employing agency; and
    - b) the employee acted reasonably and responsibly.
  - An employee will only be considered to have not acted in a manner that was reasonable and responsible where the employee has engaged in serious or willful misconduct or culpable negligence.
- APRA has purchased directors' and officers' liability cover that applies to all APRA staff; insurance cover is reviewed annually and is routinely subject to internal audit.
- ASIC legal protection and cost coverage:
  - ASIC, its Commissioners and its staff are protected from legal liability in relation to an act done or omitted in good faith in performance or purported performance of any function, or in exercise or purported exercise of any power, under the corporations legislation or a prescribed law.
  - Practical position: ASIC considers it unlikely that staff would be sued in connection with discharge of obligations.
  - In the event a staff member was sued in relation to employment, the Australian Government would cover the legal costs (unless it was in relation to an administrative law issue, in which case ASIC would cover the legal costs) (s246 ASIC Act).

### Supervisory resources: funding, staffing, and training
- APRA funding and staffing:
  - APRA considers its funding sufficient to enable effective discharge of its supervisory role.
  - APRA Act enables APRA to hire risk specialists, industry experts or other professional staff.
  - APRA's pay scales are benchmarked externally on an annual basis.
  - APRA has emphasized recruitment of financial sector skills and experience; pay scales generally sufficient to attract and retain qualified staff, but APRA has faced high staff turnover when markets for financial and risk management skills are strong.
  - APRA invests heavily in training and development; in benchmark surveys APRA consistently ranks in the 90th percentile of organizations in terms of training expenditure.
  - Over 80 percent of APRA's staff training is targeted at development of core supervisory skills; current priorities include prudential supervision and leadership capabilities.
  - APRA runs a program of seconding staff to other prudential regulators and agencies abroad.
  - APRA is equipped with an adequate information technology infrastructure; staff have access to computer equipment and other tools to monitor and review the insurance industry.
  - APRA's travel budget allows necessary onsite visits to insurers, including some reviews of foreign operations.
- ASIC funding and staffing:
  - ASIC views current funding levels as adequate for the level and outcomes of interaction with the regulated population and outcomes of enforcement activity; more resources would be needed for a more proactive approach to supervising the conduct of business by insurers and insurance intermediaries (see ICPs 9 and 19).
  - ASIC remuneration benchmarking (August 2011): Senior Executives are paid 10-20 percent above the APS median; more junior roles sit at the median of the APS pay scales.
  - Performance-based bonuses available to ASIC staff range from 3 to15 percent.
  - As of November 2011, ASIC's ongoing employee turnover rate was 12.5 percent (a rolling 12 month average), an increase of 3.6 percent from the previous year.
  - Internal survey: self-reported staff retention over the next two years is 59 percent (higher than the 44 percent for large APS agencies); 20 percent of staff indicated they intend to leave within the next two years.
  - ASIC management regards current staff turnover as "at a healthy level."
  - In 2010-2011, ASIC spent around A$1.4 million on formal learning programs.
  - ASIC supports staff studies financially (up to A$5,000/year) and through study and leave entitlements.
  - ASIC has developed learning pathways aligned with business needs and offers seminars and Continuing Professional Development programs.
  - The ASIC Act allows ASIC to hire outside experts where necessary.

### Integrity, conflicts of interest, and professional standards
- APRA:
  - APRA's code of conduct sets standards of conduct and consequences for failure, including guidance on managing potential and existing conflicts of interest.
  - APRA staff sign a declaration at appointment committing to honesty, due diligence, and compliance with APRA rules and instructions.
  - Biennial stakeholder surveys since 2009: integrity and professionalism of APRA staff received high ratings.
  - APRA Members must disclose any interest (direct or indirect, pecuniary or not) that could conflict with proper performance of their office; disclosure must be in writing to the Minister and to each of the other Members.
  - If an APRA Member has an interest that could conflict, the Member must disclose and seek consent of other APRA Members before a matter is decided.
  - APRA Chair must take reasonable steps to ensure adequate disclosure-of-interests requirements apply to APRA staff and APRA delegates.
  - APRA staff required to submit an annual summary statement of any direct security holdings in financial sector companies regulated by APRA, and those of their immediate family.
  - Staff must notify a senior manager immediately if a conflict of interest arises or could arise between duties and investments.
- ASIC:
  - ASIC and its staff must avoid situations where external or personal interests may conflict, or appear to conflict, with ASIC's administration or enforcement; administered through the Declarations of Interest Program.
  - ASIC Commissioners must disclose direct or indirect pecuniary or other interests that could conflict with decision-making on a particular matter; Commissioners required to disclose to the Minister every six months any relevant pecuniary interest, including in financial products regulated by ASIC (s124(2) ASIC Act).
  - All ASIC staff are required under the Public Service Act and internal policy to disclose and take reasonable steps to avoid any conflict of interest and not make improper use of inside information; ongoing conflict disclosure obligation exists.
  - Staff must complete a disclosure of interest form on financial interests and outside employment upon commencement and biannually thereafter.
  - Since September 2011, ASIC internal policy prohibits trading by ASIC staff members most likely to handle market sensitive information unless pre-trading approval obtained from ASIC's Risk and Security Unit, which compares requests to a restricted list.
  - Compliance with the APS Code of Conduct monitored by ASIC's Risk and Security Unit; procedures exist for investigating and resolving breaches.
  - ASIC has a Professional Standards Unit reviewing complaints about staff conduct related to regulatory activities.
  - Chairman of ASIC can impose sanctions (including termination) for breaches of APS Code of Conduct (s15 Public Service Act).

### Use and governance of outside experts and contractors
- APRA:
  - Uses contractors, consultants and outside experts to support enforcement activities, provide short-term replacements, support project work, and provide specialist professional knowledge for intellectual outputs.
  - Contractors required to sign declarations committing to honesty, due diligence, and compliance with APRA rules and instructions.
  - Contractors must sign the IT Security and Privacy Policy and Declaration and the Information Security Policy Manual and Declaration.
  - Outside experts are governed by the same secrecy provisions as APRA staff.
- ASIC:
  - ASIC has a well-established procurement process and uses a standard form contract covering monitoring, quality and conflicts.
  - ASIC performs due diligence on providers, considering conflicts of interest and suitability.
  - For each expert, ASIC designates one or more ASIC contacts responsible for monitoring, meetings, draft checks, quality assurance and sign-off.
  - Outside experts are governed by the same secrecy provisions as ASIC staff.

### Assessment, observations, and recommended reforms
- Assessment: Partly observed.
- Key observations:
  - Several elements of the Australian regulatory framework affect operational independence, accountability, transparency and adequacy of resources of APRA and ASIC (under ICP 2).
  - The relevant Minister has powers ranging from the possibility to give directions to APRA and ASIC, to being in charge of certain supervisory decisions (e.g., suitability of controlling shareholders of an insurer). Use of these powers is generally subject to a clear and transparent legislative process and requires decisions be made on the basis of supervisory agency advice.
  - Some Ministerial powers have been rarely, if ever, used and do not generally include day-to-day technical decision-making, but their existence remains a concern as they could be exercised in a way that adversely affects supervisory policy.
  - APRA and ASIC are dependent on Government approval for funding. A significant amount of ASIC's funding is non-core and earmarked for specific projects; the relative share of non-core funding has been increasing in recent years, with the budget for 2012-13 continuing this trend. This raises concerns about ASIC's ability to decide operational allocation of a significant part of its resources.
  - Resources allocated by ASIC to proactive surveillance are very limited, leaving parts of the regulated population, including insurance intermediaries, subject to largely reactive surveillance (see ICP 9).
  - Budget approval by elected officials exposes APRA and ASIC to potential cutbacks for financial or political reasons, though there are no indications of political interference in supervision of insurers or intermediaries.
  - If an APRA Member or an ASIC Commissioner is removed from office, reasons are not required to be publicly disclosed; Government considers mandated disclosure inappropriate.
- Recommendations to strengthen operational independence and effectiveness:
  - a) Eliminate or further restrict the ability of the Minister to give directions to APRA and ASIC on matters of supervisory policy;
  - b) Eliminate or further restrict the involvement of the Minister in decisions related to individual regulated entities or individuals;
  - c) Consider possibilities to arrange the funding of APRA and ASIC in such a manner that will ensure they have the resources needed to respond to current and emerging supervisory challenges.

### Information exchange and confidentiality requirements (ICP 3)
- Scope of information and legal gateways:
  - Insurers and insurance groups submit a broad range of regulatory information to APRA under various prudential standards; APRA may require an insurer, a NOHC or their subsidiaries to produce information, books, accounts or documents (s13 of FCODA, s115 of IA and s131 and 132 of LIA).
  - APRA Act imposes a strict obligation on current and former APRA members, APRA staff, contractors, consultants, etc. to maintain confidentiality of protected information and documents.
  - APRA may share information with a domestic or foreign financial sector supervisory agency, and any agency specified in the regulations. Information that may be shared covers both qualitative and quantitative information in relation to insurers or insurance groups, including subsidiaries and NOHCs (s56 of APRA Act).
- MoUs and collaboration:
  - APRA has executed MoUs and letters of arrangement with many domestic and foreign agencies and publishes those it has authority to make public on its website.
  - APRA became a signatory to the IAIS Multilateral MoU (MMoU) in October 2009 and underwent validation by the IAIS on compliance with the strict confidentiality regime under the MMoU.
  - APRA has established close domestic and international collaboration; coordination between agencies represented in the CFR is a hallmark of Australia's arrangements.
  - MoUs are not a prerequisite for information exchange; APRA may exchange information at its discretion subject to confidentiality safeguards.
- Practices and procedures:
  - APRA applies judgement on whether to give prior notification to another supervisor before taking action against an insurer; intends to consider developing internal guidelines for formal pre-action disclosure.
  - APRA generally requests information for broad supervisory or prudential purposes and tailors the request process to the originating supervisor's expectations (from informal conversations to MoU-based requests).
  - APRA has internal procedures to ensure confidentiality of documents received under MoUs and that valid purpose tests for the IAIS MMoU are met.
  - APRA expects to provide requested information except in unusual circumstances; requests under an MoU assessed based on arrangement terms and internal protocols.
  - APRA will obtain agreement from the originating supervisor if it intends to use information received under an MoU for another purpose; IAIS MMoU necessitates informing the originating supervisor prior to passing on confidential information.
  - APRA maintains internal procedures to restrict circulation and keep information in separate confidential files on APRA's systems.
- Legal protections and limits on disclosure:
  - A person who is or has been an APRA officer cannot be required to disclose to a court any protected information, or to produce a protected document, except when necessary for purposes of a prudential framework law.
  - Any APRA employee receiving a subpoena or similar instrument must refer it immediately to APRA's legal unit.
  - Protected information cannot be released under the Freedom of Information Act 1982 (s56 of APRA Act).
  - To date, APRA has not been required to disclose information received from another supervisor to a third party; APRA would not disclose such information unless with consent of the originating supervisor or if compelled by law, and would promptly advise the originating supervisor of any request.
- Operational aspects and responsiveness:
  - APRA designates liaison officers for bilateral communication with agencies such as RBA, ASIC and AUSTRAC.
  - APRA's Statistics unit has a policy of responding to requests by external agencies for data within two days.
  - For international liaison, APRA has a central coordination point and individually tracks responses to ensure timeliness and comprehensiveness.
  - APRA's disclosure powers are not subject to reciprocity conditions; APRA does not require strict reciprocity in practice.
- Assessment: Observed.
- Comment: APRA empowered to obtain and exchange information subject to confidentiality, purpose and use requirements; signatory to bilateral MoUs and IAIS MMoU; effectiveness could be enhanced by internal policies on notifying supervisors in advance of actions against insurers.

### Licensing (ICP 4) — APRA's licensing framework and practice
- Legal authority and scope:
  - APRA empowered under the IA and LIA to authorize general and life insurers and NOHCs; may license insurers to operate as a corporate entity in Australia (including subsidiaries of foreign-incorporated entities) or as a branch of a foreign-incorporated entity.
  - Only Eligible Foreign Life Insurance Company (EFLIC) branches are allowed to conduct life insurance; currently EFLICs are restricted to corporations in the USA and no branches have been established.
  - APRA maintains a register of licensed insurers, including licensing conditions for general insurers, on its website (Part III of IA, Part 3 of LIA and Life Insurance Regulations 1995).
  - IA and LIA use the terminology "authorisation" and "registration" respectively, with the same legal effect as licensing.
- Licensing guidance and requirements:
  - APRA publishes guidelines outlining the licensing process for general and life insurance and NOHCs on its website.
  - An overriding consideration: applicant must demonstrate capacity and commitment to conduct insurance business on a continuing basis, with integrity, prudence and professional skill.
  - Applicants must satisfy APRA that they will meet all applicable legislation, prudential and reporting standards, including:
    - fit and proper standards for responsible persons (ICP 5),
    - risk-based capital requirements (ICP 17),
    - governance and risk management standards (ICPs 7 and 8).
  - Applicants must submit a three-year business plan covering entity and group operations, structure, proposed activities and detailed financial projections.
  - Group or joint venture applicants must provide additional information on reporting lines and intra-group transaction policies.
- Ownership and foreign applicant considerations:
  - APRA requires substantial shareholders to be well-established, financially-sound entities of standing and substance; they must demonstrate long-term commitment and ability to contribute additional capital if necessary.
  - Ownership in insurers is subject to:
    - a) FSSA – limits shareholdings of an individual shareholder, or group of associated shareholders, to 15 percent of an insurer's voting shares. The Treasurer may approve shareholdings in excess of 15 percent if not contrary to the national interest.
    - b) Foreign Acquisitions and Takeovers Act 1975 (FATA) – empowers the Treasurer to block proposed acquisitions by foreign persons; proposals resulting in substantial controlling interest by a foreign person must be submitted to the Foreign Investment Review Board.
    - c) IATA – protects the public interest by preventing unsuitable persons being in positions of influence over insurers and prevents undue concentration; certain triggers require compulsory notification to the Minister and a "go-ahead" decision prior to acquisition or takeover.
  - Powers under FSSA and IATA have in some instances been delegated to APRA, subject to certain asset limits.
  - Treasurer delegation asset limits (as at source):
    - A$ 1,000 million for general insurers;
    - A$ 5,000 million for life insurers.
  - For foreign-owned subsidiaries or branches, APRA considers the level and scope of prudential supervision in the foreign applicant's home country; applicants must provide:
    - a) an outline of prudential supervision arrangements by the home supervisor; and
    - b) a statement from the home supervisor consenting to the application, confirming the foreign applicant's good financial standing, and agreeing to cooperate with APRA in supervision.
- Process, timing and conditions:
  - Licensing process: preliminary consultation with APRA, submission of a draft application, onsite reviews by APRA and a final review.
  - No statutory timeframe for decision; process typically takes between 3 and 12 months, depending on complexity and quality of application.
  - Successful applicants informed in writing.
  - APRA may impose additional requirements, conditions or restrictions where appropriate; conditions must relate to prudential matters.
  - APRA may make authorization/registration conditional on the parent being an authorized NOHC.
  - Restrictions on scope of licenses (e.g., lenders mortgage insurers required to be mono-line) are published on APRA's register (s13 of IA and s22 of LIA).
  - Refusal to grant a license and imposition of conditions or restrictions are reviewable decisions.
- Organizational arrangements and presence:
  - The Licensing Group ensures consistency of licensing decisions, issues internal guidance, provides recommendations and responds to policy issues across APRA-supervised industries.
  - All licensed insurers are required to have a physical presence within Australia.
  - APRA has licensed some insurers with minimal physical presence and for those consulted with relevant home supervisors and undertaken onsite prudential reviews in home jurisdictions.
- Recent licensing activity (since 2006):
  - APRA has licensed 24 general insurers, 1 life insurer, and 9 general insurance NOHCs.
  - These included 8 foreign-owned general insurers and 1 foreign-owned life insurer.
- Definition note:
  - General insurance business is defined as (subject to limited specified exclusions) 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 (s3 of IA).

*Source: _cr12312 - Section 58 of the APRA Act protects APRA and its staff from any liability for any act*

### Part VII of IA relates to Lloyd‟s underwriters authorized to carry on insurance

### _cr12312 - Part VII of IA relates to Lloyd‟s underwriters authorized to carry on insurance

### Unauthorized Foreign Insurers (UFIs) and brokers
- UFIs are given limited exemption to conduct certain insurance business that cannot be appropriately placed in Australia without authorization (s93 of IA; s3A of IA and Part 2 of Insurance Regulations 2002).
- Exemption restricted to: insurance contracts for atypical risks (e.g., liability relating to radioactive material), high-value insureds, or other risks that cannot reasonably be placed in Australia; and insurance contracts required by foreign laws, typically for offshore properties or liabilities.
- Brokers placing business with UFIs:
  - Must hold an Australian Financial Services License (AFSL) issued by ASIC.
  - Must advise clients that an UFI is not authorized under the IA and not subject to APRA supervision.
  - Must make reasonable enquiries before certifying that a contract cannot be placed with an Australian insurer and document the enquiries and reasons.
- APRA collects data on brokers, including details on insurance placed with UFIs, provides information to the Government and ASIC, and publishes such data for external analysis. Where data suggests suspicious activities, APRA refers cases to ASIC. ASIC is currently looking at three referrals from APRA.
- Activity statistics: For the six-month period ending 31 December 2011, total premiums placed with UFIs by brokers was A$ 685 million relative to the A$18 billion received by authorized general insurers.
- Note: UFI terminology introduced in 2008 replacing DOFI; operating revenues or total assets above $200 million, or over 500 employees, define "high-value insureds" context.

### Discretionary Mutual Funds (DMFs)
- DMFs offer “discretionary covers” that give the DMF discretion whether to pay a claim; most operate over a one-year time horizon.
- Operate on a claims-incurred basis; end-of-year surpluses fund risk management or are returned to members; funds typically do not retain earnings or build capital to withstand underwriting losses.
- If claims exceed contributions, trustees/directors may have recourse to members for further contributions or may decline/not fully pay claims.
- Three broad categories:
  - Category 1 — financing and administration of the self-insured retention;
  - Category 2 — risk pooling arrangements between organizations with a common connection;
  - Category 3 — provision of insurance-like coverage to members of professional, sporting and other associations.
- DMFs prohibited from writing medical indemnity covers; may provide product liability, public liability or other liability covers provided not by way of a contract of insurance.
- Because of discretionary nature, DMFs are not captured under the definition of an “insurance contract” and do not require authorization under the IA.
- APRA has collected data on DMFs since 2008 to enable Treasury monitoring and consideration of prudential regulation (Amended IA and Discretionary Mutual Funds Act 2007).

### Life insurance and Private Health Insurance
- Life insurance business: issuing life or sinking fund policies, undertaking liability under such policies; continuous disability policies considered life insurance business. APRA may declare other business as life insurance business (s9, s9A, s12A and s12B of LIA).
- Life insurers required to maintain at least one statutory fund and separate statutory funds for investment-linked and overseas business (s31 of LIA).
- Private health insurance may only be offered by insurers registered by the PHIAC under the PHIA; private health insurers are subject to product and pricing controls and have little scope for risk or underwriting selection; principal function is claims administration.
- Assessment Observed.

### APRA licensing and market conduct observations
- Insurance activities in Australia can only be conducted by authorized insurers. APRA is licensing authority under IA and LIA and has established licensing requirements aligned with international best practices.
- Licensing procedures are clear; APRA publishes licensing requirements and maintains a register of licensed insurers.
- Authorities are monitoring UFIs and DMFs to determine need for prudential supervision.
- Assessment Observed.

### ICP 5 — Suitability of Persons (Fit and Proper)
- APRA prudential standards on Fit and Proper identify minimum requirements for fitness and propriety of a “responsible person” (director, senior manager, auditor, appointed actuary). A new consolidated prudential standard CPS 520 Fit and Proper will come into effect on 1 July 2012.
- Definition of “senior manager” is broad and intended to include key persons in control functions; APRA may determine a person is a responsible person if they play a significant role in management or control (CPS 520).
- Insurer/NOHC requirements:
  - Implement a written Fit and Proper Policy;
  - Assess fitness and propriety prior to initial appointment and annually;
  - Ensure persons are not appointed or retained if not fit and proper;
  - Meet additional requirements for certain auditors and actuaries;
  - Provide information to APRA regarding responsible persons and assessments.
- Fit and Proper Policy must be approved by Board (or Compliance Committee for an EFLIC); insurers must ensure responsible persons are aware of the policy.
- APRA prudential practice guides set minimum considerations: character, competence, experience, track record in compliance, and whether past management deficiencies resulted in business failure (GPG 520 and LPG 520).
- Notification and enforcement:
  - Insurers must notify APRA within 10 business days if a responsible person is assessed as not fit and proper; if retained, notification must state reasons and actions taken.
  - APRA can direct removal of directors or senior managers deemed not fit and proper and may apply to Federal Court for disqualification (s24, s25, s25A, s27, s44 and s49R of IA and s230B(2)(d) and 245A of LIA).
  - Disqualification register published by APRA.
- Auditors and actuaries:
  - Auditors/audit firms must be registered with ASIC before auditing under the CA; registration criteria include qualifications and competency standards. Auditors must meet APRA eligibility criteria; disciplinary matters dealt with by Companies Auditors and Liquidators Disciplinary Board (s39 of IA and s84 of LIA).
  - CA auditor independence rules include: general independence requirement; restrictions on employment and financial relationships; two-year cooling-off for audit partners becoming client officers; rotation of lead and review auditors after five years for listed companies; disclosure requirements for non-audit services. ASIC surveillance includes auditor independence compliance.
  - Actuaries must meet APRA eligibility criteria (s39 of IA and s93 of LIA).
  - APRA may refer inadequate performance of auditors/actuaries to professional associations or the Companies Auditors and Liquidators Disciplinary Board and may direct their removal (s49R of IA and s125 and s125A of LIA).
- APRA exchanges information with domestic and overseas authorities on suitability matters (ICP 3 and ICP 25).
- Assessment Largely observed.
- Recommendations to enhance suitability framework:
  - Require insurers to notify APRA of any circumstances that may materially adversely affect the suitability of significant owners.
  - Separate “Key Persons in Control Functions” from the definition of “senior manager” under “responsible persons”.

### ICP 6 — Changes in Control and Portfolio Transfers
- Supervisory approval required for proposals to acquire significant ownership or control of an insurer, and for portfolio transfers or mergers.
- FSSA 15 percent threshold:
  - Holding ownership/interests subject to a 15 percent limit unless higher limit approved by Treasurer on national interest grounds.
  - Treasurer may declare practical control even if stake ≤ 15 percent; stake equals aggregate voting power of person and associates.
  - Exceeding 15 percent without Treasurer approval results in an unacceptable shareholding situation; Treasurer may apply to Federal Court for remedial orders including divestment (s12 of FSSA).
  - Prior approval required to raise ownership above the approved percentage (s17 of FSSA); Treasurer can vary or revoke approvals if national interest concerns arise (s17(6) of FSSA).
- IATA and transfers:
  - Proposal enabling control or director appointments requires notification and approval under IATA; Treasurer may make divestment order for unauthorised action (s58 of IATA).
  - Prior approval of the Minister required for transferring 15 percent or more of the insurance business; Minister must be satisfied policyholders’ interests will be protected (s41 of IATA). The 15 percent threshold is calculated on liabilities in respect of transferring policies, unearned premiums provision or outstanding claims provision (s36 of IATA).
- General insurance transfers require a Federal Court-confirmed scheme; APRA must be provided with scheme and actuarial reports and assesses protection of policyholders (Division 3A, Part III of IA).
- Life insurance transfers likewise require Federal Court confirmation and APRA review (Part 9 of LIA); voluntary transfers under FSGRTB require APRA satisfaction on policyholder protection (s11 of FSGRTB).
- APRA assesses FSSA applications using internal guidelines considering capital position, capital management, financial viability, risk management, governance, fitness and propriety, and integration issues. APRA may seek overseas supervisory information when relevant.
- Persons must provide appropriate information on shareholding interests; APRA has powers to require insurer shareholder information; ASIC can issue disclosure notices (s115 of IA and s131 of LIA).
- Assessment Largely observed.
- Recommendation: Insurers should be required to notify APRA on any significant decrease in ownership by a person(s) below the pre-determined control level approved by the Minister.

### ICP 7 — Corporate Governance
- Corporate governance requirements set out in CA, IA, LIA and APRA prudential standards: Governance (GPS 510 and LPS 510) and Risk Management (GPS 220 and LPS 220).
- Board responsibilities:
  - Ultimate responsibility for sound and prudent management.
  - Maintain and approve business plans and risk management framework; oversee implementation.
  - Have a formal charter; document delegations to management; monitor delegated authority; ensure directors and senior management collectively have required skills.
  - Require majority of independent directors and an independent chair; specific arrangements for branch insurers (senior officer outside Australia or Compliance Committee for life branches).
  - Annual assessment of Board performance; Board renewal policy; Board Remuneration and Board Audit Committees with composition requirements.
- Remuneration policy must support long-term financial soundness and risk management; APRA assesses compliance through offsite and onsite reviews and has reviewed major entities’ remuneration arrangements.
- Board Audit Committee responsibilities include oversight of statutory/financial reporting, internal and external audit, and appointment of auditor. External auditors must audit annual financial statements and APRA statutory reporting and produce an annual report on data reliability and actuarial/financial reporting controls.
- Governance oversight:
  - APRA assesses Board effectiveness through onsite reviews, meetings with chairs and CEOs, and may attend Board meetings. APRA can intervene where governance weaknesses identified (see ICP 10).
  - Prudential standards require an annual Risk Management Declaration to APRA.
- Disclosure:
  - Only listed insurers are required to disclose comprehensive governance information under ASX principles; recommendation that all insurers be required to disclose governance practices in annual reports.
- Assessment Observed.
- Recommendations to enhance governance:
  - Amend requirements to more explicitly indicate Boards’ responsibility to maintain and enforce policies to deal with conflicts of interest.
  - Require all insurers to disclose governance practices in their annual reports.

### ICP 8 — Risk Management and Internal Controls
- APRA prudential standards on Risk Management: GPS 220 (general insurers), LPS 220 (life insurers), GPS 221 (Level 2 general insurance groups), supplemented by other standards/practice guides covering capital adequacy, business continuity, outsourcing, reinsurance, IT security, insurance, credit, balance sheet and market risk.
- Insurer obligations:
  - Establish a risk management framework and strategy appropriate to nature and scale of operations addressing all material risks including strategic, insurance and operational risk.
  - Periodically review risk management framework, internal controls, and people/functions involved.
  - Maintain independent control functions (risk management, compliance, actuarial, internal audit) with appropriate access and resources.
  - Designate an Appointed Actuary; Appointed Actuary roles and responsibilities set out in GPS 310, LPS 320 and GPS 311; Appointed Actuary must be independent of certain management roles and must immediately notify APRA of matters significantly affecting policyholders.
  - Maintain an independent and adequately resourced internal audit function with unfettered access to business lines and Board Audit Committee.
  - Outsourcing requirements (GPS 231 and LPS 231) specify insurer responsibility, materiality, agreements, APRA access, monitoring and audit arrangements.
- APRA supervision:
  - Assesses risk management and control functions via offsite analyses and onsite reviews; actuarial specialist unit participates in actuarial reviews.
  - Reviews actuarial reports annually and assesses actuarial inputs for pricing and reinsurance.
  - Assesses internal audit quality, independence, use by Board, and response to findings.
- Assessment Observed.
- Recommendation: APRA should consider requiring each insurer to designate an officer with overall responsibility for compliance to reinforce accountability and facilitate supervisor communication.

### ICP 9 — Supervisory Review and Reporting
- APRA’s integrated, risk-based supervision uses off-site monitoring and onsite inspections to examine insurer business, evaluate condition, Board and Senior Management quality, and compliance.
- Risk-based approach anchored on PAIRS and SOARS methodologies; PAIRS rating correlates to a SOARS stance determining supervisory intensity; Supervisory Action Plan (SAP) details supervisory activities.
- Regulatory scope and resources:
  - At time of assessment, number of regulated entities subject to PAIRS ratings totaled 934; majority from superannuation sector: 391 superannuation funds and 203 trustees.
  - APRA advised it has adequate resources for offsite monitoring and onsite reviews for all prudentially regulated entities; Executive Group reviews allocation of supervisory resources quarterly.
  - Quality assurance via sign-off protocols, benchmarking sessions, Executive Group Presentations of SAPs, and Executive Group Reporting; monthly reports highlight SOARS movements; detailed industry analysis every 12 months.
- Reporting standards pursuant to FSCODA:
  - General insurers — 30 reporting standards at entity level and 12 at group level covering financial position, performance, capital adequacy, investments, concentrations, premiums, and claims; reports generally quarterly and annually for insurers and half-yearly for insurance groups.
  - Life insurers — 14 reporting standards covering solvency, capital adequacy, financial position, performance, assets, and policy liabilities.
- Reporting requirements and notifications:
  - Insurers must report off-balance sheet exposures and notify APRA of outsourced material business activity and consult prior to outsourcing outside Australia (GRF 130 and LRF 210 and GPS 231 and LPS 231).
  - Prompt reporting of material changes including breaches of financial obligations/minimum capital (s38AA of IA and s231A of LIA); developments materially affecting a general insurer’s risk profile (GPS 220); limitations on right to conduct insurance business outside Australia (GPS 220); material deviations from life insurer risk management (LPS 220); major disruptions (CPS 232); changes to responsible persons (CPS 520).
  - Appointed Auditors and Appointed Actuaries must immediately notify APRA of matters significantly affecting policyholders (s49A of IA and s88 and s98 of LIA).
- Data submission and validation:
  - Insurers submit regulatory reports via Direct to APRA (D2A) with digital security certificates and validation rules; APRA conducts post-submission data quality checks.
  - General insurer Financial Information Declaration must be signed by CEO and CFO; Appointed Auditor prepares certificate on whether statutory accounts present a true and fair view (GPS 220, s49J of IA and GPS 310 and LPS 310). For life insurers, auditor must report on reliability of annual returns.
  - External auditor annual report must address reliability of statistical and financial data and adequacy of systems and controls (GPS 310 and LPS 310).
  - Appointed Actuary required to advise on valuation of insurance liabilities and provide impartial assessment; for general insurers a peer review actuary must comment on reasonableness of assumptions (s49K of IA and GPS 310 and s97 of LIA and LPS 320).
- Supervisory tools: exception reporting, summary reports, MicroStrategy dashboard; Quarterly Risk Reviews synthesize quarter information, industry and macro context.
- APRA periodically reviews reporting requirements; example: 2007 streamlining life insurer data and 2009 alignment of general insurance prudential reporting with Australian Accounting Standards.
- Onsite inspections:
  - Objectives/scope determined by SAP; planning formalised in scoping document with sign-off; baseline supervisory activities prescribe minimum frequency for onsite reviews.
  - Typically, APRA holds a closing meeting with the insurer within a week of the onsite review.
- Assessment Observed.

*Source: _cr12312 - Part VII of IA relates to Lloyd‟s underwriters authorized to carry on insurance*

### conclusion of an inspection. This is followed by the issuance of a formal review

### _cr12312 - conclusion of an inspection. This is followed by the issuance of a formal review

### APRA: formal review reports and follow-up
- Remedial actions after an inspection are classed as:
  - requirements (must comply) for failures to comply with legislation or prudential standards, or fundamental deficiencies in risk management or governance;
  - recommendations to be formally considered by the insurer;
  - requests for additional information that must be complied with;
  - suggestions for improvement.
- Depending on findings, APRA sends a formal review report to either the Chief Executive Officer or directly to the Board. Review reports relating to branches must be sent to the local Chief Executive Officer, with a copy to the immediate reporting supervisor in the Head Office.
- The insurer is expected to provide a formal response to APRA within 20 working days to address the findings.
- Frontline supervisors follow up on remedial measures; remedial measures and responses are taken into account in the insurer's future SAP.

### APRA access, outsourcing, and onsite reviews
- APRA has set prudential requirements for outsourcing of material business activities by insurers; outsourcing agreements must include a clause allowing APRA to conduct onsite reviews of service providers (GPS 231 and LPS 231).
- APRA has undertaken reviews of underwriting agencies and outsourced claims operations under these contract provisions.
- APRA has access to premises of insurers, with or without consent or with a search warrant, to ascertain contraventions of legislation. APRA's powers extend to NOHCs and other related companies (s115, s115A and s54 of IA and s132 and s133 of LIA).

### Assessment of supervisory performance: transition matrices, PER, MPR
- APRA publishes:
  - “transition matrices” tracking migration between the four SOARS stances; and
  - indicators linked to financial failures and losses to beneficiaries:
    - the Performing Entity Ratio (PER) = number of regulated institutions that met their commitments in a given year ÷ total number of regulated institutions;
    - the Money Protection Ratio (MPR) = value of liabilities to beneficiaries in Australia that remained safe in a given year ÷ total value of liabilities to beneficiaries in Australia in regulated institutions.
- As at end-June 2011, based on transition matrices:
  - around 56 percent of institutions were in the Normal stance;
  - 41 percent in Oversight;
  - 1 percent in Mandated Improvement;
  - 2 percent in Restructure.
- Since APRA's inception in 1998:
  - the annual PER has averaged 99.90 percent;
  - the annual MPR has averaged 99.96 percent (MPR dominated by losses associated with HIH Insurance).

### PAIRS (Probability and Impact Assessment of Insurer Failure)
- PAIRS splits insurers into peer groups for comparability; APRA does not publish PAIRS ratings but informs insurers of their rating (confidential).
- PAIRS covers categories: board; management; risk governance; strategy and planning; liquidity risk; operational risk; credit risk; market and investment risk; insurance risk; capital coverage/surplus; earnings; access to additional capital. The last three are capital categories.
- For each category, assessment is made on:
  - inherent risks;
  - management of and control over inherent risks;
  - net risk (residual risk after mitigating effects of management and controls);
  - capital support.
- Scores applied on a continuous scale of 0 to 4 (0 best, 4 worst). Board, management and risk governance scored at net risk level. For other categories (except capital categories) supervisors give separate scores for inherent risk and related management and controls; the simple average is the net risk.
- A significance weight is assigned to net risk of each category; significance weights of all categories (excluding capital categories) add to 100 percent. For capital categories, significance weights for the three capital categories add to 100 percent.
- The probability of failure incorporates:
  - probability rating – low, lower medium, upper medium, high and extreme;
  - the probability index (a continuous curve whose function is the fourth power of the overall risk of failure).
  - Example: a very low overall risk of failure (0.25), with a probability index of 1 is calibrated to approximate an indicative external rating of AAA; a high medium overall risk of failure (1.83), with a probability index of 11 approximates a BBB rating.
- The impact of failure incorporates:
  - impact rating – low, medium, high and extreme;
  - impact index derived with reference to each entity's total resident Australian assets (except for general insurers, whose total assets are multiplied by three before applying relevant formulae). APRA may adjust impact ratings where appropriate.

### SOARS: supervisory stances and corresponding actions
- SOARS stance determines nature and intensity of supervisory activities; four stances derived from PAIRS:
  - Normal — prudential reviews and periodic analysis of data;
  - Oversight — more frequent and/or targeted prudential review and analysis, communication with auditors/actuaries/responsible persons; special investigations; requests for revised business plans;
  - Mandated Improvement — requiring rectification plans and monitoring milestones; requiring revised business plans; increasing capital requirements; issuing directions; accepting enforceable undertakings; consideration of fitness and propriety issues; prohibitions on acquisitions, etc.;
  - Restructure — withdraw licenses; replace persons and/or service providers; merge entities; run-off existing business; restrict business activities; quarantine assets; appoint an inspector, judicial manager or provisional liquidator; issue directions or sanctions; place the company into receivership/liquidation.

### ASIC: conduct of business supervision
- ASIC responsibilities for insurance activities:
  - enforcing consumer protection provisions of the ASIC Act;
  - enforcing licensing, conduct and disclosure provisions of the CA;
  - administering the Insurance Contracts Act 1984 (ICA).
- ASIC supervisory activities are typically triggered by industry intelligence, complaints, breach reports; ASIC also conducts proactive supervision (mystery shopping, thematic reviews, review of new licensees).
- ASIC can obtain information and meet/interview relevant persons; has statutory powers to compel production of documents or responses.
- Surveillances:
  - reactive (e.g., response to complaint or industry intelligence);
  - proactive (to examine industry environment or test concerns).
- Surveillances often involve direct interaction and exercising information-gathering powers; usually conducted via desktop reviews though onsite reviews occur when appropriate.
- ASIC generally would not issue a formal report after surveillance but issues public reports on regulatory issues identified and steps taken.
- In 2011 ASIC released three public reports on:
  - Product Disclosure Statement (PDS) for telephone sales of general insurance products;
  - sales practices of ADIs relating to consumer credit insurance;
  - general insurance claims handling and internal dispute resolution procedures.
- There were thematic reviews without public reports on: insurance comparison websites; home building and contents insurance; travel insurance; portable valuables insurance.
- Where ASIC identifies serious or systemic misconduct, it may require rectification via statutory measures (Directions to Give Statements, Enforceable Undertakings). Failure to comply would lead to further adverse regulatory outcomes (s912C of CA and s93AA of ASIC Act).
- ASIC recognizes outsourcing of AFSL-related functions and has compulsory information-gathering powers to require documents, information, and examinations of service providers; such powers must be used responsibly and are typically exercised in surveillances and investigations.

### Observations and feedback
- Assessment: Largely observed.
- Comments:
  - APRA's risk-based supervision framework is anchored on PAIRS and SOARS; baseline supervisory program exists for all insurers.
  - APRA collects extensive regulatory/statistical information from insurers; reporting obligations of general insurers extend to their NOHC and related companies; APRA may request ad hoc supervisory information.
  - Clear scoping statements and processes for onsite reviews; APRA issues formal review reports timely and monitors implementation; APRA empowered to inspect service providers and has conducted such inspections.
  - Given ASIC's broad mandate, it typically monitors conduct of business via desktop reviews; onsite reviews mainly in response to suspected or identified misconduct.
  - Industry feedback suggests scope for ASIC to have more proactive engagement and a more consultative approach to prevent breaches rather than manage systemic misconduct consequences.

### Recommendations to the authorities (as stated)
- a) review the effectiveness of ASIC's current predominantly desktop approach to supervising insurers' conduct of business;
- b) empower ASIC to inspect service providers of outsourced functions by insurers;
- c) ensure that ASIC is equipped with adequate supervisory resources including the technical capacity for effective and proactive surveillance of insurers' conduct of business.

### ICP 10 — Preventive and corrective measures (APRA)
- APRA encourages voluntary remedial actions; where concerns not satisfactorily addressed, APRA increases frequency/intensity of oversight per SOARS.
- APRA has powers for proportionate preventive and corrective measures, including:
  - addressing unauthorized insurance business (differences under IA and LIA; unauthorized life insurance activities do not constitute an offence under the LIA; decision to prosecute unauthorized general insurance lies with the DPP; no prosecutions on unauthorized insurance business noted);
  - higher prudential standards for a specific insurer or NOHC (general insurance), e.g., increasing minimum capital requirements or strengthening outsourcing arrangements;
  - enforcement measures (ICP 11).
- DPP prosecutions consider prima facie case and prospects of conviction.
- APRA has operational capacity and internal guidance for emergency action; crisis management powers generally delegated to Executive General Managers and APRA Members.
- Under SOARS, progressive escalation of actions is supported—from requirements after onsite review through appointment of a judicial manager.
- Insurers under "Mandated Improvement" must submit and comply with remedial plans; frontline supervisors monitor using APRA’s Activity and Issues Management System; APRA may commence enforcement action if deliverables not met.

### Unauthorized insurance business penalties and remedies (selected values)
- General insurance unauthorized business:
  - It is a criminal offence to carry on insurance business in Australia without APRA authorization; offence is strict liability subject to clear penalties.
  - Maximum penalty: 60 penalty units for individuals (A$6,600) and 300 penalty units for corporations (A$33,000).
- Life insurance:
  - No explicit offence under the LIA for unauthorized life insurance activities; APRA may use information-gathering powers or seek injunctions; APRA may cooperate with ASIC (powers under s17 and s235 of LIA).

### ICP 11 — Enforcement: powers, processes, and measures
- APRA's approach: cooperative and open initially; escalation to specialized Enforcement Unit where necessary. One-day enforcement options training every six months for frontline supervisors.
- Enforcement Committee composition: APRA Member (Chair), an Executive General Manager, representatives of supervision, enforcement and legal areas.
- APRA enforcement measures include (selected list):
  - requiring targeted audits or special purpose review for general insurers (s40 of IA and GPS 310);
  - commencing formal investigations into affairs of general insurers, NOHCs and subsidiaries and/or initiating criminal proceedings (s50 of IA and s137 of LIA);
  - imposing conditions on authorization/registration (s13 and s19 of IA; s22 and s28B of LIA);
  - issuing directions, including recapitalization directions to general insurers and notices to life insurers relating to statutory funds (new power since 2008);
  - entering into enforceable undertakings (s126 of IA and s133A of LIA);
  - applying for restraining or performance injunctions from the Federal Court (s129A of IA and s235 of LIA);
  - removal or disqualification of persons (ICP 5);
  - applying for judicial management;
  - compulsory portfolio transfers when certain criteria met (life from 2008; general with effect from June 2010); APRA must consult ACCC and ASIC unless they request otherwise; enforceability technical issue under review by APRA and Treasury;
  - revocation of authorization of general insurers under specified grounds; cancellation of registration of life insurers is voluntary or for defunct insurers (LIA position on cancellation under review).
- APRA's enforcement decisions are subject to merits review by the AAT, though some crisis resolution powers are exempt from merits review.
- Statutory sanctions under IA and LIA vary by nature and gravity; distinctions exist between strict liability and other offences.
- It is a criminal offence, punishable by imprisonment for 12 months, to give false or misleading information or documents to a Commonwealth entity, including APRA.
- Failure to provide information to APRA within specified period is an offence under the FSCODA (s137 of the Criminal Code 1995 and s9 and s14 of FSCODA).
- No statutory impediments to APRA simultaneously seeking preventive/corrective measures while pursuing sanctions. LIA explicitly provides that institution of proceedings for an offence does not prevent initiating judicial management or winding-up of a life insurer.
- Where criminal charges are appropriate, APRA refers matters to the DPP; under arrangements from October 2011, where criminal sanctions such as fines are imposed, APRA is responsible for monitoring receipt of such fines.

### Issuance of directions, recapitalization directions, and judicial management
- Since 2008 APRA can give directions to insurers/NOHCs based on statutory triggers (s104 of IA and s230B of LIA) for likely contraventions, protecting policyholders' interests, solvency concerns, material deterioration, improper conduct, or systemic stability concerns.
- Directions may require insurers to comply with IA/LIA/prudential standards; conduct audits or actuarial investigations; remove or replace directors/senior managers/auditors/actuaries; refrain from actions (giving financial accommodation, pay dividends, borrow/transfer monies); cease issuing or renewing policies.
- Non-compliance with a direction is an offence on each successive day of non-compliance; APRA may apply to the Federal Court for an injunction ordering compliance. Issuance of a direction is reviewable.
- APRA may give recapitalization directions to increase insurer capital levels, subject to consultation with ACCC. A recapitalization direction is not a legislative instrument (s103B of IA and s230AB of LIA).
- APRA may apply to the Federal Court for appointment of a judicial manager to assume control of an insurer to facilitate rehabilitation or resolution promoting policyholder interests and financial stability. Judicial managers have statutory powers to facilitate recapitalization and are subject to Court directions rather than APRA.
- Example action: during 2009/10, a judicial manager was appointed to each of two small general insurers that had been in run-off since 2002.

*Source: APRA: Supervisory Oversight and Response System, November 2010; assessment and commentary as presented in the source document.*

### Part 8 Division 1 of LIA).

### _cr12312 - Part 8 Division 1 of LIA).

### Enforcement and APRA powers
- APRA and inspectors can request information and require all reasonable assistance; it is an offence to "conceal, destroy, mutilate or alter a book relating to the affairs of an insurer that is being investigated" (s55 and s61 of IA; s147 of LIA).
- In 2009/10, enforcement actions completed from:
  - collapse of the HIH Insurance Group in 2001, and
  - improper reporting between General Reinsurance Australia Limited and Zurich Australia Insurance Limited.
- Disqualifications arising from those matters: 24 and 9 individuals, respectively, who were either formally disqualified or entered enforceable undertakings not to occupy senior positions.
- APRA powers (expanded in 2008) include direction issuance and appointment of judicial managers; APRA enforces corrective action and imposes sanctions guided by a publicly available Enforcement Manual and a dedicated Enforcement Unit.
- Assessment: Observed. Comment: progress in harmonising enforcement powers, but differences remain (e.g., no direct power to revoke a life insurer license).

### Winding-up and exit from the market (ICP 12)
- Insolvency and external administration governed by the CA: liquidation, receivership, and voluntary administration.
- APRA may apply to the Federal Court to wind up an insurer on grounds of insolvency; insolvency defined as inability "to pay all the person‟s debts, as and when they become due and payable." (cash-flow test).
- Principal resolution options available to APRA include:
  - application for appointment of a judicial manager;
  - winding-up an insurer;
  - facilitating a transfer of business;
  - revoking authorization or imposing conditions;
  - issuance of directions (including to facilitate recapitalization);
  - transfer of business to another insurer or a bridge insurer.
- Assessment: Largely observed.

### General insurance: creditor ranking, assets in Australia, and Policyholder Compensation Facility (FCS)
- Policyholders rank pari passu with other unsecured creditors in winding up; Australian policyholders and other creditors in Australia have priority over insurer's assets in Australia.
- General insurers must hold "assets in Australia having value not less than their liabilities in Australia."
- FCS details:
  - established October 2008;
  - coverage: eligible policyholders; claims less than A$ 5,000 have no eligibility criteria; claims of A$ 5,000 or greater limited mainly to Australian citizens or permanent residents, small business entities in Australia, and non-profit bodies in Australia;
  - certain classes excluded, including reinsurance and retrocession policies, indemnification of other policies, and certain historical pre-authorization liabilities of a foreign general insurer;
  - post-funded with payouts met by a standing appropriation, currently capped at A$ 20 billion per general insurers;
  - Government can recover shortfalls by imposing a levy on the general insurance industry;
  - standing legislative appropriation provides funding of A$10 billion to facilitate transfer of insurance business to prevent a failure (s.131A IA).
- Operational notes:
  - In 2010/11 APRA developed internal arrangements for FCS operation;
  - In 2010/11, the FCS paid out around A$ 73,000 in relation to one general insurer;
  - The Scheme extended for a further 12 months to enable submission of claims.
- Assessment: Largely observed. Comment: requirement to hold assets in Australia gives a large measure of protection supplemented by FCS.

### Life insurance: statutory funds, run-off preference, and exclusion from FCS
- APRA may direct life insurers regarding Part IV of LIA statutory funds; directors liable for losses to statutory fund arising from non-compliance unless they demonstrate due diligence (s49 and s50 of LIA). APRA has not issued such a notice so far.
- Criminal offence (imprisonment not more than six months) for obstructing life insurer investigation by concealing/destroying records (s147 of LIA).
- Statutory funds:
  - must be maintained and credited with all amounts attributable to that fund; assets available only for expenditure properly related to the fund;
  - directors required to give priority to policy owners ahead of shareholders where conflicts arise (Part 4 of LIA).
- Liquidation ranking for statutory fund assets:
  - first: preferential claims specified in the CA (s556 of CA) — costs of external administrator, certain winding-up costs, priority employee entitlements, injury compensation claims;
  - remaining assets applied in ranking: a) policy liabilities referable to the primary fund; b) other liabilities referable to the business of the primary fund; c) any remaining assets applied as Court considers equitable (s187 of LIA).
- Government decision: FCS not applied to life insurance due to long-term nature of liabilities, difficulties providing ongoing cover, and potential long activation of FCS (possibly years or decades); preferred options: facilitate transfer of business to another insurer or require run-off.
- Standing appropriation for funding transfers of life insurance liabilities: A$10 billion (s251A of LIA).
- Assessment: Largely observed. Comment: court discretion can affect cross-fund distributions; authorities should consider legal priority of general policyholders over unsecured creditors and greater legal priority for life policyholders' claims across statutory funds.

### Reinsurance and risk transfer (ICP 13)
- Prudential standards relevant: GPS 220, LPS 220, GPS 221, GPS 230, LPS 230, LPS 320.
- General insurers must maintain a Reinsurance Management Strategy (REMS) approved by the Board and submitted to APRA; REMS must include risk tolerance statements and, for foreign subsidiaries/branches, group linkages and intra-group reinsurance arrangements.
- Life insurers: Appointed Actuary must provide written advice before entering/modifying/terminating reinsurance; Appointed Actuary reports on reinsurance in the Financial Condition Report.
- Reporting and supervisory processes include:
  - routine reporting of premiums ceded and recoveries; Reinsurance Arrangements Statement (RAS) at least annually for general insurers; Reinsurance Declaration signed by CEO and Chief Reinsurance Officer annually.
  - APRA offsite analysis and onsite reviews, including thematic reviews (e.g., post-2010/2011 catastrophes) and proposed data collection of reinsurance counterparty information.
- Credit for reinsurance:
  - general insurers hold additional capital for exposures to non-APRA authorized reinsurers (can be as much as 100 percent of the reinsurance asset exposure);
  - life insurers can only take credit for reinsurers that are parents/related entities to authorized life insurers and approved by APRA; reinsurance with other non-authorized life reinsurers is given no credit.
- Jurisdictional analysis: Australia, Bermuda, Germany, the United States of America, and Switzerland accounted for 93 percent of all reinsurance expenses (12 months to June 2010).
- Documentation/timeframes:
  - general insurers: within two months from inception must have a placement slip/cover note signed and stamped; within six months full treaty wordings signed and stamped;
  - post-31 December 2008 contracts must specify Australian law and dispute resolution in Australian courts, otherwise reinsurance assets deducted from Tier 1 capital.
- LRTAs and capital credit: LRTAs require APRA review and approval to be treated as reinsurance for capital purposes.
- Assessment: Observed. Comment: APRA reviews reinsurance strategies and exposures; reinsurance coverage essential given natural catastrophe exposure.

### Valuation (ICP 14)
- Valuation rules based on Australian accounting standards (based on IFRS) and APRA prudential standards; assets and liabilities generally valued on fair value and market-based approaches.
- Insurance liabilities:
  - recognized based on contract inception date;
  - liabilities determined gross and net of reinsurance;
  - Appointed Actuary must value insurance liabilities and report via ILVR (general insurers) and FCR (life insurers);
  - actuarial peer review required for ILVR; auditor certificate required.
- Discounting and margins:
  - liabilities valued using market-derived risk free discount rates with additional margins;
  - general insurers: central estimate plus risk margin to achieve minimum 75 percent level of sufficiency for insurance liabilities;
  - life insurers: best estimate liability plus present value of future profit margins; discount rate for solvency purposes subject to maximum of the mid-swap rate;
  - solvency liability and capital adequacy liability for life insurers use prescribed solvency and capital adequacy assumptions and margins.
- Embedded options and guarantees: required to be allowed for; life insurance embedded options valued by option pricing or by adjusting assumptions; accounting separation of embedded derivatives required where applicable.
- Assessment: Observed. Comment: APRA should consider specifying level of certainty provided by risk margins in life insurance liabilities.

### Investment requirements (ICP 15)
- Legal and prudential framework: IA, LIA, CA, prudential standards, and practice guides.
- Key requirements:
  - general insurers: maintain assets in Australia equal to or exceeding liabilities in Australia; investment risk charge in capital framework; certain assets attract 100 percent capital charge or deduction;
  - life insurers: statutory fund structure with restrictions on mortgage/charging of statutory fund assets, restricted investments reporting, and priority to policyholders.
- Risk charges and reserves: inadmissible asset reserve, resilience reserve for ALM risk; single asset exposure thresholds leading to 100 percent capital charge if exceeded.
- Supervisory review: APRA assesses security, liquidity, diversification, custodian arrangements, and investment manager oversight through onsite reviews and specialist market risk unit.
- Related-party balances for life insurance industry as at 30 June 2011: A$ 26 billion, or about 161 percent of shareholders‟ funds.
- Assessment: Observed. Comment: regime appropriate but could benefit from additional quantitative restrictions (e.g., large exposures, related-party investments, complex assets); APRA should extend supervision formally to life insurance groups (see ICP 23).

### Enterprise Risk Management for solvency purposes (ICP 16)
- Risk management standards: GPS 220, LPS 220, GPS 221 and supplementary prudential standards and guides.
- Requirements:
  - insurers must establish risk management framework appropriate to nature and scale, covering strategic, insurance, operational, credit, market, liquidity risks and group risks;
  - framework must include business plan, capital management strategy, target and trigger capital ratios above regulatory minimums;
  - ORSA elements are embedded in existing standards and capital planning but no explicit mandatory ORSA with prescribed stress testing for all insurers.
- APRA supervisory approach:
  - offsite analysis and onsite reviews, use of specialists, assessment of models, stress and scenario testing, review of FCR and ILVR.
- Gaps and developments:
  - LAGIC project (implementation in 2013) will introduce Internal Capital Adequacy Assessment Process (ICAAP);
  - prudential standards do not explicitly require documentation of measurement approaches and key assumptions unless seeking internal model accreditation;
  - no explicit requirement for quantitative ORSA linking economic capital and regulatory capital except for internal model applicants.
- Assessment: Largely observed. Recommendations:
  - require explicit description of relationship between risk tolerance limits, regulatory capital, economic capital, monitoring processes;
  - require documentation of measurement approaches and assumptions;
  - require establishment of quantitative and qualitative risk tolerance levels and use in operations;
  - provide explicit guidance on performing ORSA.

### Capital adequacy (ICP 17)
- Ongoing LAGIC reform due for implementation January 2013 to align life and general insurer capital treatment and common risk categories.
- Current standards: GPS 112 (general insurers), LPS 2.04 Solvency Standard (life insurers), LPS 3.04 Capital Adequacy Standard (life insurers).
- General insurers:
  - capital base split into Tier 1 and Tier 2 with deductions and limits;
  - MCR determined by internal model subject to APRA approval or prescribed method;
  - prescribed MCR components: investment risk charge, insurance risk charge, insurance concentration risk charge;
  - insurance risk charge calibrated to 99.5 percent level of sufficiency.
- Life insurers:
  - statutory fund assets must meet "solvency requirement" (wind-up basis) and "capital adequacy requirement" (going-concern basis);
  - solvency requirement calibrated to 99.5 percent level of sufficiency on wind-up; capital adequacy requirement calibrated to 99.75 percent level of sufficiency on a going-concern basis;
  - solvency and capital adequacy requirements comprise solvency/capital adequacy liability, other liabilities, resilience reserve, inadmissible assets reserve, and expense/new business reserve as applicable.
- Group and supervisory issues:
  - APRA does not set group-wide capital adequacy requirements for life insurance groups but assesses group capital adequacy for relevant life insurers;
  - no prescribed solvency control level (PCR) across industry; each insurer sets its own PCR subject to APRA review;
  - internal models subject to governance, use, and sufficiency tests; model sufficiency includes documentation and independent technical review at least once every three years.
- Assessment: Largely observed. Recommendation: APRA should increase transparency and consistency of solvency control levels.

### Intermediaries (ICP 18)
- Intermediaries providing advice on general or life insurance are carrying on a financial services business and must hold an AFSL under the CA; insurance brokers required to hold an AFSL.
- Agents (authorized representatives) are exempted from holding AFSLs; insurers appointing agents must notify ASIC within 15 business days.
- ASIC licensing assessment considers capacity to comply with statutory requirements (efficiently, honestly and fairly; conflict management; compliance; competence; dispute resolution; adequate resources; compensation arrangements).
- Minimum financial requirements: base level requires solvency, total assets exceed total liabilities, meet ASIC cash needs requirements, and meet audit requirements (positive net assets and cash to cover three months' operating expenses).
- Notification and reporting obligations: intermediaries must notify ASIC of breaches or likely breaches; external auditors must report adverse matters to ASIC.
- Client money protections: statutory safeguards for segregation, use and distribution; client money accounts subject to trust in event of intermediary insolvency (s981A, s981B, s981E, s981H, s984A, s984B of CA).
- ASIC enforcement powers include suspension/cancellation of AFSL, banning/disqualification, injunctions, winding-up orders, and financial penalties.
- Assessment: Observed. Comment: mature regime; ASIC adopts reactive approach due to resource constraints; scope for more explicit corporate governance requirements for intermediaries.

### Conduct of business (ICP 19)
- Consumer protection framework combines statutory requirements, external dispute resolution, and ASIC supervision:
  - ASIC Act prohibits misleading/deceptive conduct, unconscionable conduct, undue harassment/coercion, and requires services with due care and skill;
  - CA requires regulated parties to act "efficiently, honestly and fairly";
  - ICA requires insurers to act with utmost good faith and contains rules on unusual terms, question clarity, contract interpretation and disclosure, and prevents refusal of claims where breach did not contribute to loss.
- Licensing and supervisory statistics (end-2011):
  - 55 general insurers with 5,874 authorized representatives;
  - 28 life insurers with 618 authorized representatives;
  - 1,477 insurance brokers or agents, with 34,473 authorized representatives; the top 10 insurance brokers or agents have around 40 percent of total authorized representatives.
- ASIC supervisory approach to intermediaries is both reactive and proactive; resource allocation examples:
  - 20 full-time staff in Deposit Takers Credit and Insurers Team in 2010/11 for supervising conduct of business;
  - CARI Team financial adviser surveillance staffing: 31 in 2009/10, 11 in 2010/11, 16 at time of assessment; CARI conducted 42 reactive and 2 proactive surveillances for insurance intermediaries in 2010/11 and supervises 3,345 AFSL holders providing financial product advice.
- Consumer fairness expectations:
  - LIA imposes duty on directors regarding statutory fund administration and priority to policyholders, but does not require insurers/intermediaries to "establish and implement policies and procedures on the fair treatment of customers that are an integral part of their business culture" (ICP Standard 19.2).
- Assessment: Observed. Comment: ASIC interprets CA obligations as meeting ICP 19.2, but statutory requirement for embedded fair treatment policies could be strengthened.

*Source: _cr12312 - Part 8 Division 1 of LIA).*

### 2. General insurance products, except for personal sickness and accident

### 2. General insurance products, except for personal sickness and accident

### Classification and training
- General insurance products (except personal sickness and accident) are classified as Tier 2; life insurance products are Tier 1.  
- Tier 2 products are described as generally simpler and subject to lighter training standards (Appendices A and B of RG 146 Licensing: Training of Financial Product Advisers).  
- The Ripoll Report: “The major criticism of the current system is that licensees‟ minimum training standards for advisers are too low, particularly given the complexity of many financial products”.  
- Industry feedback supports strengthening minimum training standards for insurance intermediaries (brokers and agents) and representatives of AFSL holders. ASIC is reviewing its approach to assessment and professional development.  
- Recommendation (authorities): implement the enhanced training and competencies standards proposed by ASIC.

### Disclosure, advice and conduct of business
- At point of sale insurers/intermediaries must provide:
  - a Product Disclosure Statement (benefits and risks),
  - a Financial Services Guide (FSG),
  - where applicable, a Statement of Advice.
- Obligations to ensure a reasonable basis for advice include reasonable inquiries into the client‟s personal circumstances, knowledge, experience, needs, priorities and circumstances (s945A, s945B of CA).  
- If only general advice is provided, clients must be notified that their specific objectives, financial situation or needs were not considered.  
- ASIC Consultation Paper 164 and RG 146 and RG 181 provide guidance on distinctions between factual information, general and personal advice, and on conflict-management arrangements.  
- ASIC does not have mandate to supervise insurance product development but supervises marketing practices; false or misleading statements are an offence (s1041E of CA, Part 2 Division of ASIC Act).  
- Gap identified: no requirement for insurers to service policies appropriately through to the point at which all obligations under the policies have been satisfied (relevant for legacy life portfolios).  
- Recommendation (authorities):
  - broaden ASIC‟s authority to supervise claims handling practices, policy servicing to expiry, and product development;
  - require insurance intermediaries to ensure privacy protection of customers;
  - ensure ASIC is adequately resourced to conduct proactive supervision of about 1,560 AFSL holders.

### Claims handling, dispute resolution and industry codes
- “Handling insurance claims” is excluded from definition of a financial service in the CA; ASIC‟s powers generally do not apply to claims handling. Proposed amendments to the ICA would introduce ASIC powers for claims handling if enacted.  
- The General Insurance Code of Practice requires claims handling and complaint management to be fair, transparent and timely; the Code has been adopted by the majority of general insurers (s766A (2)(b) and Reg. 7.1.33).  
- AFSL holders must have arrangements to manage conflicts of interest, compensate those suffering loss where breaches occurred, and provide internal and external dispute resolution for retail clients. Details on accessing the dispute resolution scheme must be provided in the FSG and PDS.  
- ASIC oversees external dispute resolution arrangements (s912A of CA, RG 165 and AS 4269 1995). ASIC publication: “You can complain” (RG 165, AS 4269 and RG 139).  
- FOS (Financial Ombudsman Service): national service resolving disputes between consumers and financial service providers, determines vast majority of disputed claims and reviews all stages of insured–insurer dealings including claims handling.  
- Larger life insurers: members of the Financial Services Council; expected to comply with its Industry Code of Ethics and Code of Conduct.

### Sales practices and remuneration reforms
- Person is prohibited from offering a financial product during an unsolicited meeting unless conditions are met (s992A of CA and Regulatory Guide 38).  
- Insurance contracts are currently excluded from unfair contract terms provisions of the ASIC Act; government consultation underway on whether unfair contract terms provisions should apply to insurance contracts (s13 and s15 of ICA).  
- For home building insurance derogating from standard cover, reliance on exclusion/limitation requires proof that insured was clearly informed in writing, or insured knew, or a reasonable person could be expected to have known, about the exclusion or limitation (s35 of ICA).  
- FOFA reforms introduced to Parliament; reforms commence from 1 July 2012 and are not mandatory until 1 July 2013. Key elements:
  - duty for advisers to act in the best interests of clients;
  - ban conflicted remuneration structures for investment and superannuation products;
  - ban commissions on insurance products to the extent the product is bundled with a default superannuation product or is a group policy within any superannuation product;
  - no ban on commissions for insurance products held outside a superannuation product.

### Product rationalization and legacy products
- Proposals Paper on Product Rationalization of Managed Investment Schemes and Life Insurance Products (2009) aims to remove economically inefficient “legacy products” by transferring beneficiaries into new, more efficient products.  
- Estimated total funds under management in legacy products might amount to A$ 221 billion. Proposals under consideration at time of assessment.

### Assessment of conduct regime
- Assessment: Partly observed.  
- Comments/high-level findings:
  - Current regime sets high-level principles on fair treatment of customers but needs clearer guidance aligned with international best practices.
  - Minimum training and competency standards for intermediaries should be strengthened.
  - Gaps in ASIC legal authorities (e.g., claims supervision, policy servicing) dilute conduct supervision effectiveness.
  - ASIC supervision is predominantly desk-top, heavily reliant on self-reporting and third-party notifications (ICP 9) due in part to limited resources.
- Key recommended actions:
  - implement ASIC‟s enhanced training/competency standards;
  - require intermediaries to protect customer privacy;
  - empower ASIC to establish/enforce regulatory requirements to ensure fair treatment of customers and product development;
  - resource ASIC to perform proactive supervision to prevent misconduct rather than react.

### ICP 20 — Public Disclosure
- Legal and reporting framework:
  - Disclosure required by Australian Accounting Standards, the CA, APRA prudential standards on capital adequacy, and ASX reporting requirements for listed insurers.
  - APRA publishes statistical publications on general and life insurance at aggregate and insurer levels.
  - Policyholders can access financial statements and annual returns submitted by a life insurer to APRA via APRA‟s register.
- Accounting standards require disclosures including:
  - liability adequacy test results and solvency position of a life insurer;
  - claims liabilities disclosures for general insurers: central estimate, risk margin component, percentage risk margin, intended probability of adequacy, and process for determining risk margin;
  - life insurers to disclose effects of material changes in assumptions, by product group and statutory funds;
  - disclosures on capital management objectives, policies and processes, and compliance with externally imposed capital requirements;
  - where internal models are used for minimum capital, insurers must disclose that fact and provide MCR calculations using both internal model and prescribed method.
- Gaps and limitations:
  - Insurers are not required to publicly disclose enterprise risk management or all reasonably foreseeable and relevant material insurance risk exposures (they do provide such to APRA).
  - Some disclosure items called for by ICP 20 apply only to listed insurers; certain items are not required at all.
  - Small and unlisted insurers are exempt from many disclosure requirements.
- Recommendations:
  - APRA and ASIC should cooperate to address shortcomings including:
    - exemption of small and unlisted insurers from many disclosure requirements;
    - limited detail disclosed on capital adequacy of life insurers;
    - need for disclosure of analysis of sources of earnings;
    - need for comprehensive disclosures on corporate governance, risks and risk management.
  - Consider requiring all insurers to make their audited financial statements and required disclosures available to the public at no cost.
- Assessment: Partly observed.

### ICP 21 — Countering Fraud in Insurance
- Legal framework and enforcement:
  - Fraud addressed under ASIC Act, CA, ICA, Proceeds of Crime Act 2002 (PCA) and State criminal codes.
  - ASIC can refuse, suspend or cancel an AFSL without hearing if AFSL holder is convicted of serious fraud.
  - Under ICA, breaches may be punished by voiding insurance contracts, restitution (general insurance), or varying the contract (life insurance).
  - PCA/DPP can restrain/confiscate assets believed to be proceeds of fraud; ASIC refers matters to DPP.
- Supervisory activities:
  - APRA assesses insurers‟ fraud risk management frameworks; specialist units assist frontline supervisors and conduct onsite reviews.
  - ASIC may undertake surveillance visits where deficiencies are identified and can impose license conditions or enter enforceable undertakings.
- Mechanisms supporting fraud control:
  - prescribed recordkeeping, disclosure, corporate conduct and licensing requirements;
  - client money held in trust when paid in connection with a financial service/product;
  - AFSL holders (other than APRA-regulated) must have adequate risk management systems (ASIC guidance);
  - APRA prudential standards impose risk management requirements including countering internal and external fraud.
- Cooperation and information exchange:
  - ASIC liaises with DPP; MoUs between ASIC, APRA and AUSTRAC; ASIC empowered to share confidential information with foreign agencies (Mutual Assistance in Business Regulation Act 1992; Mutual Assistance in a Criminal Matter Act 1987).
- Assessment: Observed.  
- Comment: ASIC could strengthen oversight by adopting a more proactive inspection program of AFSL holders‟ fraud controls.

### ICP 22 — Anti-Money Laundering and Combating the Financing of Terrorism (AML/CTF)
- Regulatory coverage:
  - AUSTRAC administers the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and is FIU. AML/CTF Act applies to life insurance; general insurance is not covered by AML/CTF Act.
  - General insurance providers and intermediaries are subject to reporting and recordkeeping requirements under the Financial Transactions Report Act (FTR Act).  
- Rationale:
  - General insurance considered by Australia to pose significantly less ML/TF risk; FATF requires jurisdictions to consider applying FATF standards to non-life sector if it poses ML/TF risk.
- Reporting and information flow:
  - Life insurers must submit Suspicious Matter Reports (SMRs) to AUSTRAC; AUSTRAC forwards SMRs to APRA, ASIC, ATO.
  - General insurers/intermediaries submit Suspect Transaction Reports (SUSTRs) to AUSTRAC under FTR Act.
  - APRA and ASIC can use AUSTRAC information to focus investigations and build asset profiles.
- Cooperation:
  - APRA liaises and exchanges information with AUSTRAC regularly; APRA and ASIC have MoUs with AUSTRAC and meet semi-annually.
- Assessment: Observed.  
- Recommendation: Authorities should periodically reconsider whether general insurance should be subject to the more comprehensive requirements of the AML/CTF Act.

### ICP 23 — Group-wide Supervision
- APRA group supervision architecture:
  - Level 1: legal entity / stand-alone insurer supervision.
  - Level 2 (general insurance only): consolidated group-level supervision incorporating all entities conducting insurance or insurance-related business, domestic and international.
  - APRA progressing towards Level 3 supervision for financial conglomerates; March 2010 consultation on formalizing Level 3 framework.
- Level 2 definitions and scope:
  - Level 2 consolidation generally follows Australian Accounting Standards, with APRA discretion to include additional entities or treat some controlled entities as non-consolidated subsidiaries (GPS 001 Definitions).
  - Examples of deconsolidation/exemptions include Australian run-off and captive insurers and certain non-financial controlled entities.
  - At assessment time, all Level 2 insurance groups were headed by authorized NOHCs.
- Supervisory powers and activities at Level 2:
  - APRA can obtain information from entities, impose governance requirements on group heads, apply risk management and capital adjustments for non-consolidated subsidiaries, and require group reporting (Group Risk Management Strategy, business plans, Reinsurance Management Strategy, Insurance Liability Valuation Report).
  - APRA has used the Level 2 framework to encourage group restructures, unwind complex intra-group transactions, convert debt to equity, and extend risk management to previously unregulated entities.
- Life insurers:
  - APRA does not propose Level 2 framework for life insurers presently; reasons include statutory fund solvency focus, many life insurers being part of conglomerates supervised under other levels, and APRA‟s ability to issue group-specific prudential standards where needed.
  - APRA applies some Level 2 elements in practice at Level 1 for life insurers.
- Assessment: Largely observed.  
- Comment: APRA has effective Level 2 framework for general insurers; impending Level 3 will formalize group requirements for life insurers. Authorities should incorporate group-wide market conduct requirements in Level 2 and Level 3 frameworks. 

### ICP 24 — Macroprudential Surveillance and Insurance Supervision
- APRA mandate includes protecting beneficiaries and promoting financial stability; systemic issues are considered.  
- Data collection and analytics:
  - APRA collects extensive quantitative and qualitative data under FSCODA; publishes Quarterly Performance Statistics, Half Yearly Life Insurance Bulletin, General Insurance Company Level Statistics and APRA Insight.
  - Supervisors access data via internal applications (MicroStrategy) and research portals (Science Direct, EBSCO, Moody‟s KMV, Bloomberg).
- Industry monitoring tools and processes:
  - Industry groups (general and life insurance) meet at least once every two months with cross-divisional senior representation.
  - Industry Analysis unit produces annual comprehensive reviews and maintains industry risk registers; risk registers track high and medium risks and assign risk owners.
  - Quantitative dashboards prepared quarterly for general and life insurance highlighting trends, peer comparisons and data sourced from other agencies (RBA, IAIS).
  - Stress testing used in industry and by APRA (e.g., life insurance asset stress tests during global financial crisis; pandemic stress test parameters in 2006).
- Horizontal reviews and focused initiatives:
  - Examples: reviews of reinsurance and catastrophe models after 2010/11 catastrophes; annual horizontal reviews of general insurance pricing methodologies; LMI forum and annual review; intensified supervision of group life business.
- Use of macroprudential information:
  - PAIRS assessment methodology links entity failure probability and impact, informing SOARS stances and SAPs; assists in identifying insurers with higher systemic impact.
- Assessment: Observed.  
- Comment: APRA‟s processes/tools support macroprudential surveillance; planned increased use of stress testing will further strengthen analysis.

### ICP 25 — Supervisory Cooperation and Coordination
- Domestic arrangements:
  - APRA, ASIC and RBA (CFR members) coordinate via the Council of Financial Regulators (CFR). CFR executed MoUs including:
    - MoU on Financial Distress Management among CFR members;
    - MoU between APRA and ASIC for coordination and information sharing;
    - MoU between APRA and Treasury on policy/operational coordination;
    - MoU between APRA and RBA aimed at promoting financial stability.
  - APRA liaises with AUSTRAC, PHIAC and state motor accident and workers‟ compensation authorities; MoU with AUSTRAC exists.
- International cooperation:
  - APRA executes MoUs with relevant prudential supervisors in jurisdictions with material cross-border operations; cooperates with home/host supervisors and participates in supervisory colleges.
  - Close cooperation with Reserve Bank of NZ (RBNZ); Trans-Tasman cooperation formalized (APRA Act s8A) and MoC signed in 2010 for crisis coordination.
  - APRA is signatory to IAIS MMoU.
- Group-wide supervision coordination:
  - Where APRA is group-wide supervisor it initiates coordination, establishes supervisory colleges and determines participants based on materiality of overseas operations.
- Assessment: Observed.  
- Comment: APRA has effective domestic and international coordination arrangements and routinely shares information and engages with relevant supervisors.

### ICP 26 — Cross-border Cooperation and Crisis Management
- Frameworks and responsibilities:
  - APRA‟s powers to share information extend to crisis resolution; CFR MoU on financial distress management applies to cross-border stress.
  - CFR members responsibilities:
    - APRA: lead for prudentially regulated entities and administering the FCS;
    - ASIC: lead for securities market participants and financial market licensees;
    - RBA: lead for payment system providers, lender of last resort and market liquidity;
    - Treasury: liaises with Department of Finance and Deregulation on use of public funds in crisis resolution.
- Cross-border tools and remedies:
  - APRA can use portfolio transfers and business transfers; standing legislative appropriation provides funding of A$ 10 billion for such purposes under IA/LIA. Use of government funds would seek recovery from failed insurer in liquidation; no statutory authority currently to levy insurance industry for shortfall comparable to FCS (s131A of IA and s251A of LIA).
  - Government options include recapitalization by special appropriation or use of IA/LIA standing appropriations (A$ 10 billion), subject to “just terms” and commercial pricing of support.
  - APRA has Financial Crisis Management Plan, guidance on implementing FCS for general insurance, and guidance on powers/options to resolve a general insurer in financial distress.
- Preparedness and planning:
  - APRA held workshop on general insurance crisis resolution in 2010; plans further guidance and additional workshops (life insurance workshop planned for 2013).
  - Pilot recovery planning program for larger ADIs to be extended; APRA considering applying recovery planning to larger insurers in 2013/2014.
  - Boards of larger insurers encouraged to consider “living will” concepts.
- Cross-border coordination practice:
  - APRA engages with home and host supervisors, uses MoUs and supervisory colleges, and takes lead in coordinating group-wide resolution where APRA is group-wide supervisor. Public communications are coordinated across jurisdictions where APRA leads.
- Assessment: Largely observed.  
- Recommendation: Authorities should implement a requirement for insurers to establish and maintain contingency (recovery and resolution) plans and procedures for going- and gone-concern situations.

*Source: _cr12312 - 2. General insurance products, except for personal sickness and accident*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12312.pdf_