Regulation

Regulatory agencies

Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

The Australian Prudential Regulation Authority (APRA) is Australia’s prudential regulator. APRA is responsible for the licensing and regulatory oversight of banking, insurance and superannuation entities. It is concerned with protecting the interests of policyholders (among others) and promoting the stability of the broader financial system in Australia.

The Australian Securities and Investments Commission (ASIC) is Australia’s integrated corporate, markets, financial services and consumer credit regulator. It is responsible for regulating consumer protection and maintaining market integrity. ASIC’s establishing legislation requires it to strive to maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs and the efficiency and development of the economy.

APRA and ASIC have a memorandum of understanding that creates a framework for engagement, cooperation and information sharing between the regulators.

The Australian Financial Complaints Authority (AFCA) is the provider of an external dispute resolution scheme for consumers in relation to complaints about financial services (among other things). All Australian financial services licensees are required to be a member of AFCA. Any determinations made by AFCA are binding on the financial service provider and while AFCA will consider legal principles, applicable industry codes or guidance and previous determinations, it is not bound by any of those things.

Formation and licensing

What are the requirements for formation and licensing of new insurance and reinsurance companies?

All insurers and reinsurers in Australia must be:

  • authorised by APRA under the Insurance Act 1973 (Cth) to conduct general insurance and/or reinsurance business; or
  • registered by APRA as a life company (or friendly society) under the Life Insurance Act 1995 (Cth) to conduct life insurance and/or reinsurance business. Of interest, a registered life company is prohibited from carrying on any insurance business other than life insurance business.

 

APRA only grants authority to applicants that have the capacity and commitment to conduct their business on a continuing basis, with integrity, prudence and professional skill. Only corporations (not partnerships or joint ventures) can apply for authorisation or registration, with the exception of Lloyd’s underwriters who may be authorised to conduct general insurance and/or reinsurance business in Australia.

Depending on the business mix and distribution arrangements involved, life and general insurers may also need to hold an Australian financial services (AFS) licence under the Corporations Act 2001 (Cth) in order to provide financial services. Reinsurers are, however, generally exempt from this licensing requirement on the basis that reinsurance is excluded from the definition of a financial product.

Insurers and reinsurers must also maintain an adequate level of capital proportionate to the scale and complexity of their risk profile so that obligations to policyholders can be met in a wide range of circumstances. To enable supervision and compliance assessment, capital adequacy metrics must be reported to APRA regularly.

Other licences, authorisations and qualifications

What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?

Under the Insurance Act 1973 (Cth), it is an offence to conduct general insurance business in Australia without being authorised by APRA. Only corporations or Lloyd’s underwriters can be authorised to conduct insurance and/or reinsurance business in Australia.

Similarly, under the Life Insurance Act 1995 (Cth), it is an offence to conduct life insurance business in Australia without being registered by APRA as a life company (or friendly society). Only corporations can be registered as life companies (or friendly societies).

Additionally, life and general insurers may also need to hold an Australian financial services (AFS) licence under the Corporations Act 2001 (Cth) to provide financial services. Reinsurers are however generally exempt from this licensing requirement on the basis that reinsurance is excluded from the definition of a financial product. AFS licensees must comply with a range of obligations as a condition of holding their licence, such as the requirement to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly. There are also various potentially relevant industry codes, such as the General Insurance Code of Practice issued by the Insurance Council of Australia, and Life Insurance Code of Practice issued by the Financial Services Council.

Officers and directors

What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

At a minimum, directors and officers of Australian companies must be fit and proper persons – this includes being of good fame and character and having the requisite skills and knowledge to perform their roles and responsibilities.

Company directors are required to hold a unique identifier known as a director identification number (DIN) and to regularly inform ASIC of changes to their details and role.

Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance companies?

Insurers and reinsurers must maintain a capital base in excess of the minimum capital requirements set by APRA.

The amount of minimum capital required will vary based on the size, scale and business mix of the insurer and/or reinsurer. APRA allows insurers and reinsurers to calculate their minimum capital amount by a standard method, detailed in published prudential standards or through the use of an internally designed model, provided that meets the same fundamental requirements as are achieved by using the standard method.

Insurers and reinsurers must have a formal internal capital adequacy assessment process in place to continually assess the adequacy of their capital base.

Reserves

What are the requirements with respect to reserves maintained by insurance and reinsurance companies?

While it is a matter of actuarial discretion to determine the precise amount of reserves to be held by insurers and reinsurers, in practice, compliance with the various requirements of the prudential capital framework, which is designed to ensure the solvency and stability of the industry, is highly influential in the exercise of that discretion.

Insurers and reinsurers regulated by APRA must maintain a minimum capital base comprised of eligible assets of a value that equal or exceed the total amount of their liabilities in Australia.

Product regulation

What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?

The Insurance Contracts Act 1984 (Cth), the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) are the key sources of regulation of life and general insurance products and their distribution in Australia. Each of these Acts is administered by ASIC.

Under the Insurance Contracts Act 1984 (Cth), minimum terms are prescribed for home building, home contents, motor vehicle (property damage), sickness and accident, travel and consumer credit insurance products. An insurer who offers less than the prescribed minimum must prominently inform a prospective insured accordingly. The Act also creates a statutory duty of utmost good faith that applies to both insurers and insureds, and it curtails a number of the insurer’s common law rights in relation to pre-contractual non-disclosure and misrepresentation, such as by way of termination or avoidance of the insurance policy.

Additional consumer protection provisions are also imposed by the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). These include product design and distribution obligations, prohibitions against hawking insurance products, obligations to provide prescribed product disclosure statements and target market determinations, obligations to provide a general advice warning if the product is sold without the consumer receiving personal advice, prohibitions on misleading and deceptive conduct, prohibitions against unfair contract terms, and a deferred sales model for add-on insurance products.

There are also further specific obligations for consumer credit insurance products regulated by the National Consumer Credit Protection Act 2009 (Cth), including a cap on commissions payable to distributors of these products.

Regulatory examinations

What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?

APRA has a wide range of regulatory powers to conduct inspections and examinations of insurance and reinsurance companies. During the course of an investigation, APRA may enter premises; take possession of books; require the production of books; require persons to appear for examination under oath; and require reasonable assistance to be given to enable it to exercise these powers.

Outside of the investigation and enforcement context, APRA will have regular formal and informal interactions with the insurers and reinsurers it regulates. It also receives regular reporting on a range of financial and non-financial matters that enable APRA to monitor and supervise the industry.

In addition to APRA, ASIC will also receive reporting of particular legal breaches by insurers it regulates and uses that reporting (among other things) to enable it to identify conduct of concern to further investigate. Life APRA, ASIC has a wide range of regulatory powers to conduct inspections and examinations of insurers who are Australian financial services licensees.

Investments

What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?

Insurers and reinsurers regulated by APRA must maintain a minimum capital base comprised of eligible assets in Australia of a value that equal or exceed the total amount of their liabilities in Australia. The capital base for a general insurer, for example, must be largely comprising assets in Australia that represent a permanent and unrestricted commitment of funds, are freely available to absorb losses, do not impose any unavoidable servicing charge against earnings, and rank behind the claims of policyholders and other creditors in the event of winding-up of the issuer.

These requirements are designed to ensure that assets within the jurisdictional reach of APRA and the Australian courts are sufficient to meet the insurer’s liabilities in Australia. Investments that do not constitute relevant assets in Australia include company shares held in foreign depositories, assets held by foreign custodians, interests in trusts where the trustee does not reside in Australia.

While this does not preclude an insurer or reinsurer from making other investments with the assets it holds that exceed the minimum capital base, it does restrict the use of assets that comprise the minimum capital base.

Change of control

What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?

The Financial Sector (Shareholdings) Act 1998 (Cth) prohibits a person or group of associates from acquiring more than a 20 per cent interest in an insurance or reinsurance company without first applying to the Treasurer for approval on national interest grounds.

The Insurance Acquisitions and Takeovers Act 1991 (Cth) sets out various rules in relation to the acquisition of general and life insurers in Australia, and requires proposals for some investments to be provided to the Treasurer.

The Foreign Acquisitions and Takeovers Act 1975 (Cth) requires certain investments into Australian financial services companies by an overseas entity to be notified to and approved by the Treasurer. The process is managed by the Foreign Investment Review Board.

An AFS licensee must notify ASIC of the particulars of any change of control no later than ten business days of the change.

Financing of an acquisition

What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?

While there are no specific requirements or restrictions regarding financing the acquisition of an insurance or reinsurance company, in practice, such an investment will be subject to regulatory scrutiny and, as a result, may be indirectly impacted. For example, where the Treasurer considers it to be in the national interest to do so, transaction approval may be granted subject to particular conditions on the investment under the Insurance Acquisitions and Takeovers Act 1991 (Cth).

Minority interest

What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?

The Financial Sector (Shareholdings) Act 1998 (Cth) prohibits a person or group of associates from acquiring more than a 20 per cent interest in an insurance or reinsurance company without first applying to the Treasurer for approval.

Foreign ownership

What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?

Australia’s foreign investment policy is executed through (among other things) the restrictions and approvals required under the Foreign Acquisitions and Takeovers Act 1975 (Cth), the Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth).

Most investment proposals exceeding set thresholds (eg, 20 per cent shareholding under the Financial Sector (Shareholdings) Act 1998 (Cth) or 15 per cent of the value of certain assets under the Insurance Acquisitions and Takeovers Act 1991 (Cth)) are assessed individually against a national interest test to ensure the proposed investment is not contrary to Australia’s national interests.

Group supervision and capital requirements

What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?

Insurers and reinsurers that are part of a group of companies will be subject to the prudential regulatory framework at an individual entity level as well as at the level of a non-operating holding company (which itself may be required to be licensed, registered or authorised by APRA). For example, under APRA’s Prudential Standard GPS 110: Capital Adequacy, insurers that are part of a group must maintain an adequate level and quality of capital according to the scale nature and complexity of the risk profile of the group. In determining the adequacy of capital, the Board of the parent entity must have regard to the potential for risk to compound across the group, the concentration of capital in one entity in the group, and the ability to readily transfer capital across throughout the group. To this end, an internal capital adequacy assessment process must be designed, documented and reported against to APRA.

Reinsurance agreements

What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?

Reinsurance contracts are excluded from the definition of a financial product and are therefore not subject to the financial services licensing and conduct regulation that applies to insurers under the Corporations Act 2001 (Cth). Reinsurance contracts are also exempt from the Insurance Contracts Act 1984 (Cth). While the terms of reinsurance contracts are often regarded are largely unregulated in Australia, various principles of the common law (eg, the duty of utmost good faith and the duty of disclosure) do still apply.

For APRA regulated life and general insurers, APRA’s Prudential Standard GPS 230: Reinsurance Management requires them to have a documented reinsurance management strategy and clearly defined managerial responsibilities and controls to manage the risks arising from reinsurance arrangements. Insurers must submit their reinsurance management strategy to APRA and review it at least annually. They must also submit to APRA, on at least an annual basis, a reinsurance arrangements statement that details the reinsurance arrangements in place.

Ceded reinsurance and retention of risk

What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?

While there is no prohibition on the volume of business permitted to be ceded to a reinsurer, APRA generally expects general insurers to cede no more than 60 per cent of their total written premium in any 12-month period. That said, it is not uncommon for particular reinsurance arrangements to be put in place that provide for higher coverage (eg, 100 per cent fronting may be sought for undesirable risks).

Notably, APRA is seeking to enhance its oversight of foreign reinsurers participating in the Australian insurance industry, and in particular, the life insurance market. In April 2021, APRA released proposed amendments to Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge for consultation. The proposed reforms would impose an aggregate limit on the permitted level of exposure of APRA-regulated life insurers to foreign reinsurers.

Collateral

What are the collateral requirements for reinsurers in a reinsurance transaction?

There is no requirement that collateral be provided by a reinsurer in a reinsurance transaction. However, the provision of collateral may reduce the amount of capital the cedent general insurer would otherwise have been required to hold. This is particularly relevant to transactions involving non-APRA-regulated reinsurers. APRA considers the counterparty risk posed by non-APRA-regulated reinsurers to be higher than APRA-regulated reinsurers. Therefore, the default stress factors used to calculate a general insurer’s minimum capital base are significantly higher when applied to reinsurance recoverables due from non-APRA-regulated reinsurers. However, the default stress factors are lessened where the reinsurer provides collateral that meets the requirements of APRA’s Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge. The collateral must be in certain prescribed forms, provide effective security against the reinsurer’s liabilities, and the insurer must have access to this collateral above all creditors in the event of the reinsurer’s insolvency.

Credit for reinsurance

What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?

For an APRA-regulated general insurer, its reinsurance arrangements must satisfy the following criteria to be recognised for the purposes of the prudential regulatory framework:

  • The reinsurance contract must be legally binding.
  • The reinsurance contract must comply with the two-month rule – being that within two months of inception, the insurer must have signed and stamped placing slips or cover notes with no outstanding terms or conditions to be agreed.
  • The reinsurance contract must comply with the six-month rule – being, that within six months of inception, the insurer must have fully signed and stamped reinsurance contract documentation.
  • The governing law of the reinsurance contract must be Australian law.
  • Any disputes that fall to be determined by a court are to be heard in an Australian court.

 

APRA’s Prudential Standard GPS 340: Insurance Liability Valuation provides that where reinsurance arrangements are not fully documented or are not fully placed, or there is a risk that reinsurance assets will not be received from a reinsurer, the insurer will either not be able to recognise the reinsurance assets or will be required to hold capital against these risks.

It is also worth noting that under Prudential Standard GPS 114: Capital Adequacy Asset Risk Charge, general insurers are required to determine risk charges for the default stress of the risk of counterparty default on exposures that include reinsurance assets, which contribute to the determination of their minimum capital base requirements. The default risk charges are higher where the reinsurer is a non-APRA-regulated entity. However, collateral held against reinsurance assets may reduce these charges. Similarly, under APRA’s Prudential Standard LPS 114: Capital Adequacy Asset Risk Charge, life insurers are required to determine risk charges for the default stress of the risk of reinsurer default that will contribute to the determination of their minimum capital base.

Insolvent and financially troubled companies

What laws govern insolvent or financially troubled insurance and reinsurance companies?

Chapter 5 of the Corporations Act 2001 (Cth) generally governs corporate insolvencies. Importantly however, well before an APRA-regulated insurer or reinsurer becomes insolvent, APRA has a range of powers available to it to attempt to redress financial distress. These powers include giving orders and directions to recapitalise, or prohibiting the disposal of assets, or prohibiting the issuance of further policies.

Also, under the Insurance Act 1973 (Cth), APRA may apply to the Federal Court for an order that a general insurer be placed under judicial management. And, in appropriate circumstances, APRA may apply for a general insurer to be wound up (either under the Insurance Act 1973 (Cth) or the Corporations Act 2001 (Cth)).

Claim priority in insolvency

What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?

Section 556 of the Corporations Act 2001 (Cth) establishes a priority regime for the payment of certain debts and claims in priority to all other unsecured debts and claims owed by a company during its winding up. In the insolvency of an insurer, policyholders are unsecured creditors and have no priority under section 556.

However, some priority is given to policyholders whose policies were the subject of reinsurance or who are insured against liability to third parties. Section 562A provides that any amount received under a contract of reinsurance that equals or exceeds the amount payable by the insolvent company under the relevant contract of insurance must be paid to the policyholder (out of the amount received and in priority to the payment of all other debts). Where the amount received does not equal or exceed the amount payable, the liquidator must pay to each person to whom an amount is payable an amount calculated in accordance with the formula in section 562A(3).

Further, where a general insurer is to be wound up due to insolvency, a financial claims scheme under Part VC of the Insurance Act 1973 (Cth) may be declared over the general insurer. This entitles policyholders with valid claims to be paid certain amounts before they would otherwise receive payment in the winding up of the general insurer.

Intermediaries

What are the licensing requirements for intermediaries representing insurance and reinsurance companies?

Insurance intermediaries are not regulated by APRA. However, the Corporations Act 2001 (Cth) requires intermediaries who are engaged in the provision of financial services to obtain an Australian financial services (AFS) licence, be appointed as an authorised representative under another entity’s AFS licence, or otherwise be exempt from the requirement to hold a licence. Section 766A defines financial services to include, among other things, the provision of financial product advice, dealing in a financial product (which includes arranging for the issue of a financial product) and the provision of a claims-handling or settling service.