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LIFE INSURANCE REGULATIONS (AMENDMENT) 1998 NO. 191
EXPLANATORY MEMORANDUMStatutory Rules 1998 No. 191
Minute No. 191 of 1998 - Treasurer
Subject - Life Insurance Act 1995
Life Insurance Regulations (Amendment)
The Life Insurance Act 1995 (the Act) and the Life Insurance Regulations establish a scheme for prudential supervision of the life insurance industry.
Section 253 of the Act empowers the Governor-General to make Regulations prescribing matters required or permitted by the Act to be prescribed (with certain specified exceptions) or prescribing matters necessary or convenient to be prescribed, for carrying out the Act.
In brief, the purposes of these proposed amendments are:
* to make amendments consequential on the Financial Sector Reform legislation which was recently enacted - for example:
- to amend references to the Insurance and Superannuation Commissioner
to the new relevant regulator - either the Australian Prudential Regulation
Authority or the Australian Securities and Investments Commission
(proposed Regulations 3, 6-8, 10-11 and 13);
- to insert amendments prescribing the circumstances in which a life
insurance company can charge the assets of a statutory fund (proposed
Regulation 4);
- to amend references to 'Commissioner's rules' to instead refer to
'Prudential Rules', since these instruments will be made by the Australian
Prudential Regulation Authority (rather than the Insurance and
Superannuation Commissioner) after 1 July 1998 (proposed Regulations 5
and 2 1);
- to omit regulations which have no function after the commencement of
the Financial Sector Reform scheme on 1 July 1998 (proposed
Regulations 14, 15 and 16);
- to omit a reference to 'bank' and substituting 'ADI' (authorised deposit-
taking institution under the Banking Act 1959) (proposed Regulation 17);
* to make several other miscellaneous amendments - for example:
- to make amendments necessary as a consequence of the making, by the Life
Insurance Actuarial Standards Board, of an actuarial standard to replace a
transitional standard (proposed Regulations 9 and 20).
As indicated above, some of the proposed amendments to the regulations are consequential to the Financial Sector Reform legislation which was recently enacted.
The Financial Sector Reform legislation is the Government's response to the report of the Financial System Inquiry (the Wallis Committee).
To the extent that it is relevant to the amendments to the Life Insurance Regulations, the Financial Sector Reform legislation:
* abolishes the Insurance and Superannuation Commissioner;
* establishes the Australian Prudential Regulation Authority to undertake the
prudential regulation of deposit-taking institutions, insurance companies and
superannuation entities; and
* enlarges the role of the Australian Securities Commission, which is renamed the
Australian Securities and Investments Commission, so that it oversees
consumer protection and market integrity in the financial sector (including
superannuation and insurance).
The current role of the Insurance and Superannuation Commissioner is thus divided between the Australian Prudential Regulation' Authority and the Australian Securities and Investments Commission.
Details of the proposed amendments are attached - Attachment A.
Proposed Regulations 9 and 20 (relating to surrender values and paid-up policy values) commence on 30 June 1998. This is the date on which the transitional actuarial standard, on surrender value and paid-up policy values, ceases operation and therefore commencement on 30 June is necessary to ensure continuity for existing policy owners.
The remaining proposed regulations commence on 1 July 1998.
The Office of Regulation Review has advised that preparation of a Regulation Impact Statement in relation to these proposed regulations is not necessary.
The Minute recommends that the Regulations be made in the form proposed.
Authority: Section 253 of the Life
Insurance Act 1995.
ATTACHMENT A
Life Insurance Regulations
Proposed Regulation 1 - Commencement
Proposed Regulation 1 sets out the commencement dates.
Proposed Regulations 9 and 20 (which relate to Regulation 10.03 and Schedule 2) come into force on 30 June 1998.
The remaining proposed regulations commence on 1 July 1998.
Proposed Regulation 2 - Amendment
Proposed Regulation 2 provides that the Life Insurance Regulations are amended as set out in these regulations.
Proposed Regulations 3. 6. 7, 8 and 13 - Regulations 3.02. 9.01, 9.02. 9.04 and 11.01 (changing references to the Insurance and Superannuation Commission to APRA)
Proposed Regulations 10 and 11 - Regulations 10.05A and 10.05B (changing references to the Insurance and Superannuation Commission to ASIC)
As indicated above, from 1 July 1998, the Australian Prudential Regulation Authority will take over the prudential regulation of those bodies previously supervised by the Insurance and Superannuation Commissioner while the Australian Securities and Investments Commission will oversee consumer protection and market integrity in relation to those bodies and other parts of the financial sector.
For this purpose, the legislation previously administered by the Insurance and Superannuation Commissioner has been examined and provisions of the Act assigned to the relevant new regulator in Schedule 13 of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998.
Regulations 3.02, 9.01, 9.02, 9.04 and 11.01 relate to matters which are assigned to the Australian Prudential Regulation Authority. The proposed amendments will therefore change the appropriate references in these regulations from the Insurance and Superannuation Commissioner to references to APRA (the Australian Prudential Regulation Authority) (proposed Regulations 3, 6 - 8 and 13).
Regulations 10.05A and 10.05B relate to matters which are assigned to the Australian Securities and Investments Commission. The proposed amendments will therefore change the appropriate references in these regulations from the Insurance and Superannuation Commissioner to ASIC (the Australian Securities and Investments Commission) (proposed Regulations 10 and 11).
Proposed Regulation 4 - New regulation 4.00A (Charges over the assets of a Statutory fund: derivative contracts (Act. s. 38(3)(c))
Background
Subsection 38(3) of the Life Insurance Act 1995 provides that a life company must not mortgage or charge the assets of a statutory fund except for the limited purposes prescribed by the Act. Since the commencement of the Act, these purposes have been limited to securing a bank overdraft or in accordance with section 40. Section 40 provides that a mortgage or charge over an asset of a statutory fund, except to secure a bank overdraft, is permitted if it has been approved by the Commissioner. The Commissioner must be satisfied that the mortgage or charge is to be given in connection with the undertaking of a major development project.
The Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (FSR Act) which is scheduled to commence on 1 July 1998, amends subsection 38(3) to allow a life company to mortgage or charge the assets of a statutory fund for such other purposes and subject to such other conditions as are prescribed by regulations.
The proposed regulation extends the circumstances in which life companies may give a charge over the assets of statutory funds to include a charge over the assets for the purposes of engaging in derivatives transactions. The regulation will also prescribe the conditions under which such a charge may be given. Details
Proposed regulation 4 provides that a life company may give a charge over the assets of a statutory fund for the purposes of engaging in derivatives transactions, subject to the following conditions:
* that the charge is given in order to comply with the rules of an approved body (as defined) that requires the performance of obligations in relation to the derivatives contract to be secured; and
* that the life company has in place a risk management statement that sets out the
policies for use of derivatives; controls on the use of derivatives and compliance
processes to ensure that the controls are effective; and that the investment to
which the charge relates is made in accordance with that risk management
statement.
The approved bodies are:
a) the Australian Stock Exchange Ltd;
b) the Options Clearing House Pty Ltd;
c) the Sydney Futures Exchange Ltd;
d) the Sydney Futures Exchange Clearing House Pty Ltd;
e) a body that is an approved foreign exchange within the meaning of regulation
1.2A.02 of the Corporations Regulations;
f) a body specified in Schedule 11 of the Corporations Regulations;
g) a body that performs the clearing house functions in relation to a body mentioned in paragraph (e) or (f) (the 'second body') in accordance with the rules of the second body or a law of the country where the second body is situated.
To the extent applicable, the regulation is consistent with similar provisions under the Superannuation Industry (Supervision) Act 1993 regime.
Proposed Regulation 5 and 21 - Regulations 4.01B and Schedule 3 (changing references from 'Commissioner's rules' to 'Prudential Rules')
The instruments previously called 'Commissioner's rules' will be known as 'Prudential Rules' from the commencement of the Financial Sector Reform scheme (Item 33, Schedule 13 to the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998). The reason for this change is that the Australian Prudential Regulation Authority will take on the role of making these rules, in the place of the Insurance and Superannuation Commissioner, from the establishment of that Authority.
The proposed regulation amends the reference to 'Commissioner's rules' in Regulation 4.01B and Schedule 3 accordingly.
Proposed Regulation 9 - Regulation 10.03 (Division 4 of Part 10 of the Act not to apply to certain life policies (Act, s 206(2))
Subsection 206(2) of the Act provides that Part 10, Division 4 does not apply to life policies declared by the regulations to be excluded from the operation of the Division.
Regulation 10.03, which commenced on 1 July 1995 and was introduced as a transitional measure, in essence re-established the provisions in the Life Insurance Act 1945 (the 1945 Act). Regulation 10.03 exempted investment-linked business and risk business (other than level premium risk business of a long-term nature) from minimum surrender value requirements.
The minimum surrender value requirements under the Act are the subject of an actuarial standard, authorised under section 101 of the Act as a disallowable instrument. A transitional actuarial standard, essentially reinstating the requirements of the 1945 Act, also commenced on 1 July 1995. The transitional standard was made to allow time for the development of a new surrender value standard.
The new actuarial standard in respect of minimum surrender values and paid up values has been made and has application from 30 June 1998. The new standard prescribes minimum surrender value requirements for all types of life business, including investment-linked and risk.
As a consequence, the exemption provided by regulation 10.03 is proposed to be repealed, coincident with the commencement of the new actuarial standard.
Proposed Regulations 12 and 19 - Regulation 11.00 and Schedule -1 (reference to registration in States and Territories)
Proposed Regulations 12 and 19 amend two references in the current regulations to the State or Territory in which a company is registered under the Corporations Law.
Since separate registration is not required under the Corporations Law, it is proposed that Regulation 11.00 and Schedule 1 be amended to instead require notification of the State or Territory where the company is incorporated and each State or Territory where the company intends to carry on business.
Proposed Regulations 14. 15 and 16 - Regulation 11.02. 11.03 and 11.04 (financial sector supervisory agencies. law enforcement agencies. overseas financial sector supervisory agencies)
Section 251 of the Life Insurance Act 1995 relates to secrecy.
It is omitted by Item 29, Schedule 13 of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 because it was no longer needed. Both the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, which will administer this Act, are subject to secrecy and exchange of information provisions in the Acts which establish each body.
It is therefore proposed to omit Regulations 11.02, 11.03 and 11.04 which were made for the purposes of section 251.
Proposed Regulation 17 - Regulation 13.01 (Definition of eligible assets Dictionary)
The Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 includes amendments to the Banking Act 1959 which will introduce a new type of financial institution, an authorised deposit-taking institution (ADI), which will be prudentially supervised by the Australian Prudential Regulation Authority. Banks will be ADIs but other institutions will also be able to seek this status. Subject to agreement being reached with the States and Territories, it is likely that approved credit unions and building societies will also have this status.
Proposed Regulation 17 therefore omits a reference to 'bank' in the definition of ,eligible assets' and substitutes 'ADI'.
Proposed Regulation 18 - Regulation 13.02 (Definition of 'superannuation policy' - dictionary)
The Schedule to the Act contains a definition of 'superannuation policy'. Paragraph (b) of the definition has been amended to introduce the concept of 'kinds of policies declared by the regulations to be superannuation policies' rather than the previously used 'class of policies declared by the regulations to be superannuation policies'. This change was made to the Act for clarity.
An amendment to the existing regulation is necessary as a consequence of the change to the Act. It is proposed that Regulation 13.02 be amended by replacing the word 'classes' with the word 'kinds'.
Proposed Regulation 20 - Regulation 10.04 - Schedule 2 (Modification of Division 4 of Part 10 of the Act (Surrender values, paid-up policies and nonforfeiture of policies))
Subsection 206(2) of the Act provides that regulations may provide that Part 10, Division 4 applies to a class of life policies subject to specified modifications.
Regulation 10.04 provides for the modification of the minimum surrender value and paid-up value requirements for certain types of life policies. In effect, regulation 10.04 reinstates provisions under the 1945 Act. The provisions contained in the regulations will continue to apply after the introduction of the new actuarial standard in respect of minimum surrender values and paid-up values.
Regulation 10.04 makes reference in a number of places to the transitional actuarial standard in specifying the provisions for modification. To provide for the continued application of these provisions in respect of policies listed in Regulation 10.04, it is proposed that the definition of 'relevant actuarial standard' applying in Regulation 10.04 be amended to preserve the reference to the actuarial standard in force on 29 June 1998, that is, the previous transitional standard.
The result of this amendment is that the specified provisions for modification that previously applied to policies listed in Regulation 10.04 will continue to apply to those policies.