Following consultation (see: Governance News: 09/02/2018), the Australian Prudential Regulation Authority (APRA) has released six prudential standards and practice guides 'to strengthen governance, fitness and propriety and audit requirements for private health insurers'. APRA writes that the package aims to introduce stronger prudential standards that have successfully lifted capabilities across other APRA regulated industries.

  • Prudential Standard CPS 520 Fit and Proper and Prudential Practice Guide HPG 520 Fit and Proper (HPG 520): The changes extend the cross industry prudential standard to apply to 'all APRA-regulated institutions' including PHIs. The standard sets out minimum requirements for APRA regulated institutions in determining the fitness and propriety of to hold positions of responsibility. In particular, APRA highlights that it requires boards to establish and apply a written policy to ensure the competence and integrity of anyone exercising material influence over the company.
  • Prudential Standard CPS 510 Governance and Prudential Practice Guide HPG 510 Governance: APRA writes that this is 'a stronger cross-industry standard [ie extends to all APRA regulated institutions] on board governance and renewal, which replaces the equivalent PHI-specific standard, HPS 510'.
  • Prudential Standard HPS 310 Audit and Related Matters: This standard sets out the requirements for PHIs to appoint an auditor, and the roles and responsibilities that PHIs must require of that auditor as well as PHI obligations to enable the auditor to undertake their role. APRA states that the new requirement 'will harmonise the auditing requirements on PHIs with the balance of the insurance industry'.
  • Prudential Standard HPS 001 Definitions has been updated to include terminology referenced in CPS 510, CPS 520 and HPS 310.

In addition, Prudential Standard HPS 350 Disclosure to APRA (HPS 350) has been revoked.

APRA writes that its expectation is that 'when fully implemented, these prudential standards and guidance will drive sound governance practices, increase focus on the competence and propriety of responsible persons and strengthen the external audit function'.

APRA Executive Board Member Geoff Summerhayes said that the 'new measures are designed to encourage timely and effective decision-making, helping insurers remain sustainable, and minimising the risk of failures that could threaten policyholders’ cover'.

Timing and implementation

The revised prudential standards come into effect on 1 July 2019. APRA states that it will consider 'further transitional arrangements' on a case by case basis and that these requests should be submitted no later than 28 February 2018. APRA states that it's expectation is that the need for these arrangements will be limited given the 'extensive consultation undertaken'.

Context: APRA states that the announcement 'is the culmination of Phase Two of APRA’s roadmap for reviewing the PHI prudential framework' and flags that phase three (capital) will commence later in the year.

Response to key issues to emerge from consultation

According to APRA's letter to industry announcing the changes, APRA has not amended the drafting of the standards or guidance in response to feedback received during consultation. The letter identifies the concerns raised by industry and APRA's response to them. The key concerns raised were:

  1. concerns around guidance on director independence (and more particularly concerns around 'perceived' mandatory maximum director tenure limits of 12 years);
  2. the frequency of the appointed auditor's report on the review of systems, processes and internal controls (it was suggested that annual review was onerous on the basis that it was too frequent);
  3. the experience for the appointed auditor (5 years specific experience); and
  4. pending changes to the auditor rotation requirements arising from APES 110 Code of Ethics for Professional Accountants. APRA outlines its reasons for not changing the standards.

Guidance is not a 'mandatory prudential requirement' but APRA will consider the composition and membership of boards as part of ongoing supervision: Responding to concerns around guidance on maximum tenure limits in HPG 510, APRA states that it has 'carefully considered the submissions on this issue and confirms the guidance on director tenure is APRA’s strong expectation of sound governance practices and not a mandatory prudential requirement. Private health insurers can adopt an alternative approach in appropriate circumstances, but APRA expects the entity to be able to demonstrate that board renewal and succession planning is given sufficiently high priority'.

Director tenure: APRA goes on to note that data on the length of director tenure — 16% of non-executive directors have more than 12 years tenure, 27% exceed 10 years tenure and 6 have tenure between 20 and 31 years — 'raises the question as to whether current board renewal policies have been paid sufficient attention'. APRA will consider the composition of membership of boards as part of its ongoing supervision and engage with firms where concerns are identified.