According to the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment (FSSA), the insurance regulatory and supervisory regime in Australia highly observes the Insurance Core Principles promulgated by the International Association of Insurance Supervisors. Australia has introduced substantial reforms to incorporate international best practices and promote market innovation in the insurance sector. Within the larger insurance industry, the regulatory regimes of the general insurance sector and the life insurance sector are distinct. Therefore, the IMF conducted separate assessments of these sectors and assigned to them different compliance levels for individual principles. Both sectors get high grades from the FSSA. Recommendations to further improve Australia's supervisory regime pertain to the supervisory authority of the Australian Prudential Regulation Authority (APRA), the integrated financial sector supervisor; the regulatory role of the Treasury; insurance fraud; and the country's anti-money laundering/combating the financing of terrorism (AML/CFT) framework. A 2008 U.S. Department of State report mentions that Australia enacted the Anti-Money Laundering and Counter-Terrorism Financing Act in 2006 (after the IMF FSSA) with the potential of addressing many of the weaknesses in its AML/CFT regime. The 2007 APRA annual report notes that Australia moved towards a risk-sensitive framework of supervision, harmonized prudential standards for the life insurance sector, refined and updated standards for the general insurance sector, and enhanced overall supervisory consistency and flexibility. A 2008 IMF report adds that the APRA received additional funding in the 2007-2008 Budget to enhance its staff capacity, and its operational autonomy was also strengthened. Further, prudential regulations were broadened to include foreign insurers, and the disclosure requirements were tightened. The APRA's crisis management framework is also being broadened and cross-border coordination in crisis management between the APRA and the New Zealand supervisor has been increased.

General Overview

The 2006 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF) finds that the insurance sector regulation and supervision in Australia highly observes the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors' (IAIS). Australia has introduced substantial reforms to incorporate international best practices and promote market innovation in the insurance sector. The macroeconomic and legal frameworks are sophisticated and forward-looking. The financial markets are conducive to asset liability management by the insurance firms due to their depth, liquidity and well-oiled functioning. Federal regulation primarily accounts for prudential regulation of insurance in Australia. However, state and territorial governments do regulate certain aspects of insurance, such as workers compensation insurance, compulsory third party insurance for motor vehicles and home builders' warranty. The Insurance Act and the Life Insurance Act define the supervisory objectives in the general insurance and life insurance sectors, respectively. The regulatory regimes of both the above sectors being distinct, the IMF conducted separate assessments of these sectors and assigned to them different compliance levels for individual principles. Despite the overall high grades the insurance sectors in Australia get from the FSSA (the life insurance sector observes 22 ICPs, largely observes 5, and partly observes 1 ICP, whereas the general insurance sector observes 20 ICPs, largely observes 4, and partly observes 4 ICPs), the IMF does come up with a few recommendations to further improve the Australian supervisory regime. The key recommendations are: (1) strengthen the supervisory authority of the Australian Prudential Regulation Authority (APRA), the integrated financial sector supervisor, chiefly in the areas of policymaking, enforcement, handling troubled institutions, and cross border supervision; (2) clarify the regulatory and supervisory role of the Treasury vis-à-vis the APRA and the Australian Securities and Investments Commission (ASIC), the market conduct supervisor; (3) make the fight against industry fraud more effective; (4) make the APRA's powers over the banking, life insurance and general insurance sectors more uniform and harmonized; and (5) align the Australian anti-money laundering/combating the financing of terrorism (AML/CFT) framework with the Financial Action Task Force (FATF) 40+9 recommendations.

With regard to the last FSSA recommendation, the 2008 U.S. Department of State (DoS) report confirms that Australia is making considerable efforts to meet the revised FATF 40+9 requirements. It enacted the proposed Anti-Money Laundering and Counter-Terrorism Financing Act in 2006 (after the IMF FSSA) and further amended it in 2007; widened the powers of the Australian Transaction Reports and Analysis Centre (AUSTRAC) as the AML/CFT regulator of the financial sector entities, including increased enforcement powers to enlist compliance with the new law; and enhanced reporting and customer due diligence requirements for the regulated entities. The 2007 Article IV consultation report by the IMF also observes progress in some areas. Australia is moving towards a risk-sensitive framework of supervision with the adoption of Basel II framework (in January 2008). In the 2007/08 Budget, the APRA received additional funding to help retain highly skilled supervisory staff. In addition, legislative changes were made to enhance coordination in crisis management under the aegis of the Trans-Tasman Council. Looking forward, the APRA re-affirms its commitment in its 2007 annual report to shifting its supervisory framework towards a more principle-based and flexible approach that recognizes the diversity among the supervised entities. In 2006/2007, apart from the implementation of the Basel II framework, the APRA concerned itself primarily with the harmonization of prudential standards in the life insurance sector, updating and refining the standards governing the general insurance sector, and improving supervisory consistency and flexibility to reduce compliance burden on the supervised entities. The APRA also plans to continue improving cooperation in crisis management with its New Zealand counterpart under the aegis of the Trans-Tasman Council.

The 2008 Article IV report by the IMF mentions further progress in implementing the 2006 FSAP recommendations. The government announced in June 2008 its intention to launch the Financial Claims Compensation Scheme so as to provide the policyholders of a failed general insurer the right to have their claims met. The introduced legislation also includes broader crisis management arrangements to enhance the regulators' ability to deal with an ailing or failing general insurer. The 2007-2008 Budget, as the 2008 IMF report adds, also provided additional funding to the APRA to improve its staff capabilities over the next four years. In addition, APRA has been granted more flexibility and autonomy in its decision-making by the government's removal of the requirement that it receive ministerial consent before taking administrative actions. Lastly, the 2006 FSAP had recommended Australia to push ahead with its Stage II reforms encompassing capital management, reinsurance documentation, corporate governance standards, and disclosure requirements. The 2008 IMF report attests that Stage II reforms for non-life insurers were completed in 2006 and starting July 2008, all Direct Offshore Foreign Insurers (DOFI) in Australia must be authorized by the APRA and operate under its prudential regulatory regime. Discretionary Mutual Funds (DMF) are also required to disclose information on a much more rigorous basis. In the long run, APRA intends to harmonize prudential regulations for the life insurance, general insurance and banking sectors.

The APRA is the prudential regulator and supervisor of the Australian financial services sector. Its supervision encompasses general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry, states the APRA website. The APRA was established in 1998 and is funded mainly by the taxes levied on the supervised entities. As of 2008, assets held by the APRA's supervised entities totaled USD 3 trillion representing 21 million Australian depositors. The APRA website declares that the APRA's supervisory approach is "forward-looking, primarily risk-based, consultative, consistent and in line with international best practice." The APRA, along with the Motor Accidents Authority of New South Wales (MAA-NSW) and the Private Health Insurance Administration Council (PHIAC), is listed as a member on the IAIS website. The 2007 APRA annual report adds that the APRA is a member of the IAIS Executive Committee and its Technical Committee which is responsible for the development of IAIS principles, standards and guidance papers. APRA is also represented on the Accounting, Insurance Contracts, and Solvency subcommittees of the IAIS. The 2006 IMF FSSA further mentions that the AUSTRAC is the regulator for ensuring compliance with AML/CFT laws and regulations that are prepared by the Attorney-General's Department, and is also the country's Financial Intelligence Unit (FIU). The Treasury is responsible for preparing laws and regulations related to the financial sectors. The financial sector supervision follows the functional approach with the APRA in charge of prudential supervision and the ASIC responsible for market conduct and transparency. The Reserve Bank of Australia (RBA) is responsible for the oversight of financial stability. The IMF assessment notes that although functional approach to supervision clarifies the supervisory roles and objectives of the APRA and the ASIC, there are discernible overlaps and inherent conflicts in their respective supervision. The two supervisory agencies do, however, coordinate their activities through a variety of forums, chief among them being the Council of Financial Regulators (CFR) that comprises of representatives of the APRA, the ASIC, the Treasury and the RBA.

Elaborating on the respective powers of the APRA and the ASIC, the IMF FSSA states that the APRA has the power to administer insurance legislation and also establish prudential standards within that legislative framework. However, it does not have rule making powers, although it does interpret the laws through the issuance of prudential guidelines and preferred practices. The APRA is the integrated prudential supervisor of the financial sector, although its consolidated supervision framework is still in the works. Regarding the ASIC's supervision and powers, the IMF FSSA observes that the ASIC's "supervision of the professional conduct of insurers and intermediaries is robust" (p. 36). The codes of practice by industry bodies, independent complaint resolution scheme and Insurance Ombudsman Service contribute towards making the ASIC's overall supervision effective and robust. The ASIC also involves itself in educating the insurance industry customers through the Consumer Education Strategy. The IMF calls for explicit regulations to combat insurance fraud.

In 2005, per the 2006 IMF assessment, general insurance industry assets exceeded Australian Dollar (AUD) 80 billion, and the ratio of premiums to the national GDP was almost 3 percent. Industry consolidation and a more stringent regulatory environment had led to a decline in the number of general insurers, though their regulatory capital was more than twice the minimum requirement. The life insurance industry was similarly well-capitalized and consolidated and was hugely increasing its forays into wealth management. The RBA published its half-yearly "Financial Stability Review" in March 2008 wherein it confirms that the Australian general insurance sector remained very profitable during 2007. The aggregate return on equity for general insurers was 22 percent before taxes. Industry net premium revenue rose 4 percent. The exposure of insurers to the U.S. sub-prime risk was also very low. Overall, general insurers exhibited a strong capital position (with an aggregate capital that was still more than double the regulatory minimum requirement) and resilience to shocks. Credit rating agencies held a favorable view of general insurers and kept their ratings of the largest four insurers intact at, for instance, AA by Standard and Poor's. The same was true for reinsurers in 2007. Life insurers, in their turn too, experienced good times with their assets growing by 7 percent during the year 2007, notes the Financial Stability Review.

The Principles

ICP 1 Conditions for effective insurance supervision

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The assessment also notes that Australia has "sophisticated and progressive macroeconomic and legal supervisory frameworks" (p. 46), "sound fiscal and monetary policies" (p. 46), and "deep, liquid and well functioning financial markets" (p. 46) that are all conducive to facilitating the smooth operation and development of the insurance markets.

ICP 2 Supervisory objectives

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The Insurance Act and the Life Insurance Act clearly define the objectives of insurance supervision. The APRA is the prudential supervisor of the insurance sector while the ASIC is the market conduct supervisor. The APRA's objective, per the assessment is "to minimize failures among APRA regulated financial institutions" (p. 47), for which it adopts a risk-based and consultative approach to supervision. The ASIC, on the other hand, works under the broad objective of "achiev[ing] the outcome of a fair and efficient market characterized by integrity and transparency and supporting confident and informed participation of investors and consumers" (p. 47). The assessment, however, observes that though the respective objectives of the two supervisors are clear and transparent, there needs to be greater coordination between the APRA and the ASIC to balance out the inherent tension between their specific roles as functional supervisors of the same entities.

ICP 3 Supervisory authority

CP

This principle is largely observed, per the IMF's 2006 Detailed Assessment. The APRA has wide-ranging powers under the Insurance Act and the Life Insurance Act to establish prudential standards for the regulated institutions. The ASIC cannot issue supervisory standards since it has not been bestowed with rule-making powers, but it does issue guidelines and preferred practices. The assessment, however, takes note of the Treasurer's involvement in the operational decisions of the APRA and the ASIC, through the directions she/he gives to the APRA and the ASIC about their policy choices and priorities, and the Treasurer's agreement that the APRA has to seek before reaching a decision. The assessment observes that this may impact the supervisors' operational independence and recommends that the Treasurer's directions on individual cases be discontinued and greater clarity on the circumstances under which directions may be given be instituted, if need be, through stipulations in the existing insurance legislation. Also, since the APRA and the ASIC have in-depth knowledge of the insurance industry their policy inputs should have effective mechanisms of being considered and incorporated in the regulatory framework. The assessment finds the financial resources and powers of the APRA to carry out its activities independently "adequate" (p. 50) to ensure their autonomy. In addition, the supervisory staff has a reputation for professionalism and integrity. It has adequate legal protection for actions taken in good faith in the discharge of their duties. Confidential information is also strongly safeguarded. The APRA has supervisory procedures for consistency and accountability and has instituted both internal and external governance requirements. The minimum term of office is defined and removals can only be made for reasons spelled out in the law, though the reasons for the removal of the APRA officials are not required to be publicly disclosed.

The 2008 Article IV report by the IMF mentions some enhancements in the APRA's operational autonomy. It notes that the APRA has been granted more flexibility and autonomy in its decision-making by the government's removal of the requirement that it receive ministerial consent before taking administrative actions. Further, the 2007/2008 Budget provided additional funding to the APRA to retain high quality staff and to improve its staff capabilities over the next four years.

ICP 4 Supervisory process

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The risk-based supervisory approach adopted by the APRA constitutes rigorous internal documentation and procedures so that all supervisory activities are consistent, transparent and accounted for as also stand up to independent judicial reviews. All APRA decisions, supervisory activities and role, and market analysis are publicly available on its website. Its enforcement powers are reinforced by the use of a specialized Enforcement unit and an empowered Enforcement Committee.

ICP 5 Supervisory cooperation and information sharing

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The APRA coordinates with other regulatory agencies through different councils, committees, and working groups. The CFR is also a high-level platform for cooperation and coordination between these agencies. Further, the APRA and the ASIC have formed a joint Coordination Committee for bilateral cooperation under the terms of a memorandum of understanding (MoU). Such MoUs have been signed with other domestic and foreign supervisory agencies as well. Further, the APRA willingly cooperates with foreign supervisory agencies with information exchange and broad ranging assistance encompassing the development of prudential policies on an international level. The IMF assessment, nevertheless, implies that consultation and/or notification by the APRA to the ASIC for action taken on an insurer's actions is not up to the mark when it asks the APRA to do ensure the same happens, when appropriate.

ICP 6 Licensing

ID

According to the IMF's 2006 Detailed Assessment, this principle is observed by the Life Insurance sector and partly observed by the General Insurance sector. The assessment further notes the limited authority of the APRA to deal with unauthorized persons conducting the general insurance business, mentioning that this power is exercised by the Commonwealth Director of Public Prosecutions (CDPP). Also, since Direct Offshore Foreign Insurers (DOFIs) are not licensed in Australia, they do not fall under the APRA's supervision. The ASIC grants them the Australian Financial Services License (AFSL), but they must disclose to their retail customers that they are not APRA licensed. There have been concerns of Discretionary Mutual Funds abusing their AFSLs to avoid insurance regulation, and hence the government has agreed to implement the Potts Review recommendation to bring them under the scope of its prudential supervision. The 2007 annual report of the Treasury states in this regard that the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill to regulate the discretionary mutual funds and DOFIs was tabled in the Australian Parliament in 2007 and that the Treasury was awaiting its passage and enactment. The Commonwealth of Australia Law website, maintained by the Australian Attorney-General's Department, indicates that the bill became a law in 2007, entitled the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act.

The IMF assessment further notes that the APRA does not have powers under the Insurance Act to carry out cross-border supervision of insurance activities of subsidiaries of Australian insurers. The APRA has put forth a draft proposal to extend its authority in this area in general insurance, though not in life insurance. The APRA does insist that it follows the European Commission (EC) Regulation (d) on the regulation of cross-border establishments. However, no corresponding legislation has been enacted and the EC regulation is open to interpretation and review by the Administrative Appeals Tribunal (AAT).

ICP 7 Suitability of persons

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Full observance was brought about by the formalization of the "fit and proper" prudential standards both for general and life insurers in 2006. The framework laid down standards for appointment of board directors, senior management, and certain auditors and actuaries. The Financial Sector (Shareholdings) Act and the 1991 Insurance Acquisitions and Takeovers Act govern significant shareholdings in, and control of, financial companies. The APRA has the power to enforce these laws and prudential standards. The 2007 APRA annual report elaborates that the "fit and proper" prudential standards were accompanied by prudential practice guides to institutions. The standards make the regulated institutions responsible for judgments on the fitness and propriety of appointed officials.

ICP 8 Changes in control and portfolio transfers

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Legislation, which comprises the Financial Sector (Shareholdings) Act, the 1991 Insurance Acquisitions and Takeovers Act, and the 1999 Financial Sector (Transfer of Business) Act, lays down clear ownership and control thresholds above which APRA approval will be required. The Treasury either exercises its authority to decide on an application wherein it consults with the APRA, or delegates the assessment and approval authority to the APRA. The APRA uses the licensing criteria to assess applications for changes in control or ownership.

ICP 9 Corporate governance

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The corporate governance arrangements, policies and procedures of insurers are effectively supervised by the APRA. The corporate governance regime got a boost by the formalization of the corporate governance framework for the insurance sector in May 2006. This, per the IMF assessment, brought Australia into full compliance with this principle and also in line with the widely accepted good practice in corporate governance in Australia. The APRA annual report of 2007 adds that governance arrangements in the life insurance sector have improved with the insurers giving greater priority to policyholder interests over shareholder interests, as stipulated in the corporate governance framework.

ICP 10 Internal control

CP

This principle is largely observed, per the 2006 Detailed Assessment by the IMF. The 2001 Corporations Act lays down internal control requirements for insurers, and the ASIC monitors compliance with enforcement powers, including the power to revoke or suspend Australian Financial Services Licenses (AFSL). The assessment notes that the APRA released additional proposals on governance and risk management, which include a requirement for an internal audit function. The purpose is to strengthen and clarify internal control requirements.

ICP 11 Market analysis

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The APRA conducts analyses of individual insurance entities as well as aggregate market data to discern and keep track of trends and industry norms, and as part of its risk-based supervision. The APRA website publishes aggregate financial statistics of the regulated insurers. The APRA research and publications are supplemented by market data made publicly available by other statutory agencies and industry bodies.

ICP 12 Reporting to supervisors and off-site monitoring

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Under the 2001 Financial Sector (Collecting of Data) Act, the APRA collects extensive data and information from the regulated entities on their business activities and conduct. This information is elicited pursuant to prudential and reporting standards set by the APRA. The 2007 APRA annual report further mentions that since October 2006, general insurers are required by the APRA to submit a Financial Condition Report prepared by their Approved Actuaries. The life insurers have been subject to this requirement for a very long time. These reports, per the annual report, are a useful source of information and analysis in terms of the insurer's financials, risks and performance for both the APRA and the insurer's Board. However, their effectiveness and quality could not be determined since they had been set up very recently.

ICP 13 On-site inspection

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The APRA's risk rating system, the Probability Assessment and Impact Rating System (PAIRS), and the response system, the Supervisory Oversight and Response Systems (SOARS) form the basis of its on-site prudential inspections. The inspections, assessments, and regulatory decisions are well-documented. The Activity and Issue Management System (AIMS) is used to follow up on the inspections.

ICP 14 Preventive and corrective measures

CP

According to the IMF's 2006 Detailed Assessment, this principle is observed by the Life Insurance sector and largely observed by the General Insurance sector. The APRA's ongoing supervision of the insurance sector and its well-established channels of communication with the insurers allow it to detect problems early and enable it to use suasion as a way of guiding entities to take corrective actions. The APRA can give wide-ranging directions to life insurers under the Life Insurance Act without being constrained by Ministerial approvals or "show cause" notices. However, the Insurance Act limits these powers with respect to general insurers. The APRA requires triggering thresholds and the Treasurer's approval to take corrective action against general insurers.

ICP 15 Enforcement or sanctions

NC

According to the IMF's 2006 Detailed Assessment, this principle is observed by the Life Insurance sector and partly observed by the General Insurance sector. The powers of the APRA to give directions are neither effective nor exercised in a timely manner. Also, the APRA has limited powers under the Insurance Act to compel a general insurer if it is unwilling to cooperate with the APRA's inspection staff. It may refer such matters to the CDPP, and its disqualification decisions go to the AAT for a merit review, which is both costly and time-consuming. The APRA's power to commence a winding-up application of an insurer is also curtailed by the requirement that the insurer be under investigation under the Insurance Act and the need for the APRA to prove that the insurer's liabilities exceed its assets. Insolvency under the prudential standards is also difficult to prove since the actuarial estimates are often based on assumptions rather than exact figures. In the general insurance sector, the APRA also does not have the power to appoint an administrator for a troubled institution to protect policy holders and beneficiaries. This power, however, exists for the APRA in the life insurance sector. The IMF assessment also identifies conflicts between the Insurance Act and the Corporations Act in the appointment of an administrator. Overall, the assessment finds that the enforcement and sanctioning powers of the APRA may be "insufficient to compel compliance and to deal with emergencies" (p. 68) in the general insurance sector, though its directions powers as well as powers to wind up and make a compulsory transfer determination are fairly wide-ranging with respect to life insurers.

ICP 16 Winding-up & exit from the market

NC

According to the IMF's 2006 Detailed Assessment, this principle is observed by the Life Insurance sector and partly observed by the General Insurance sector. In the general insurance sector, the APRA does not have the power to appoint an administrator for a troubled institution to protect policy holders and beneficiaries. The general insurer's assets are domesticated in the event of its winding up to protect policy holders; however, the policy holders are not given priority over other unsecured creditors of the insurer. The situation is satisfactory in the life insurance sector where the APRA has the power to apply for an insurer's winding up, and the Life Insurance Act provides good protection of policy holders in the event of winding up of a company.

ICP 17 Group-wide supervision

CP

This principle is largely observed, per the IMF's 2006 Detailed Assessment. The APRA is an integrated prudential supervisor of the financial sector and hence all financial groups come under its supervision. The APRA supervises banks, life insurers, general insurers, as well as the superannuation industry and has adequate powers to prohibit group activities by insurers that may prejudice policyholders. However, the IMF assessment notes that the creation of a framework for consolidated supervision of insurance is still in progress.

ICP 18 Risk assessment and management

CP

According to the IMF's 2006 Detailed Assessment, this principle is observed by the General Insurance sector and largely observed by the Life Insurance sector. The general insurance sector has APRA established risk management standards that the life insurance sector lacks. However, the life sector does have implicit risk management requirements as part of their compliance with actuarial standards for capital adequacy and solvency, wherein the Financial Condition Reports prepared by designated actuaries detail the adequacy and effectiveness of the insurer's risk management systems and practices. The APRA also conducts on-site inspections of both life and general insurers. The APRA standards for the general sector are in the process of being refined, while there are plans by the APRA to introduce similar standards for life insurers under the Life Insurance Act.

The 2007 APRA annual report also mentions that the APRA stresses "the importance of strong risk management and pricing disciplines along with the need to monitor claims development trends closely" (p. 13). The annual report attests that the general insurance sector continues to make good progress in strengthening its risk management and corporate governance framework. The report also updates information on the APRA plans to issue risk management standards as mentioned in the IMF assessment. According to the report, the APRA released a discussion paper as well as draft prudential standards and guidance on risk and business continuity management for life insurers in October 2006. With industry consultation, the final prudential standards and prudential practice guides on various aspects of risk management, asset and liability management, conflicts of interest and reinsurance management were issued in March 2007.

ICP 19 Insurance activity

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The APRA's off-site analysis and on-site inspections adequately monitor the risks taken by insurers, their basis for establishing net retention and their reinsurance coverage. The APRA supervisors are assisted by the APRA's in-house Insurance Risk team and Actuarial Services team with expertise and advice on various areas of insurance risk and actuarially related matters.

ICP 20 Liabilities

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Prudential principles issued by the APRA provide best estimate valuation of liabilities for general insurance with a 75 percent margin of sufficiency. The estimates take into account diversification of risk as well as reinsurance coverage. As for life insurance, estimates of liabilities are based on actuarial estimates.

ICP 21 Investments

CP

According to the IMF's 2006 Detailed Assessment, this principle is observed by the General Insurance sector and largely observed by the Life Insurance sector. The APRA's Risk Management Strategy (RMS) requires general insurers to address investment risk; however, there is no equivalent rule for life insurers. Nonetheless, the IMF observes that there are indirect checks to ascertain that investment risk is minimized in this sector. For instance, (1) the statutory funds concept safeguards assets and investments backing liabilities; (2) the Life Insurance Act places restrictions on investments and prohibits encumbrance of assets; (3) the actuarial standards on capital adequacy and solvency deal with asset risk, favoring diversification of investments and minimizing asset/liability mismatches; and lastly (4) life insurance assets are dominated by investment linked superannuation assets that require life insurers to observe the investment mandate. The IMF also notes that the APRA is in the process of issuing prudential standards on risk management under the Life Insurance Act that will echo the RMS for general insurers.

ICP 22 Derivatives and similar commitments

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Further, the APRA "has a long and established history of monitoring insurers' involvement in derivatives" (IMF 2006b, p. 76). The circulars issued by the APRA have effectively installed a system of check and control on the use of derivatives by insurers. The in-house Balance Sheet and Market Risk Team at the APRA use their extensive knowledge and experience in this area to provide specialist advice to the frontline supervisors during their prudential inspections of insurers.

ICP 23 Capital adequacy and solvency

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF, and "the capital adequacy regime in place for general insurance is prudent and comprehensive" (IMF 2006b, p. 78). Legislative provisions to regulate capital adequacy at the group level exist, though they are not applied in practice. The life insurance sector also has effective capital adequacy and solvency regimes. The APRA further plans to harmonize capital regime of life insurers with those of banks and general insurers. The 2006 FSAP had recommended Australia to push ahead with its Stage II reforms encompassing capital management, reinsurance documentation, corporate governance standards, and disclosure requirements, as the 2008 IMF report mentions. The 2008 report attests that Stage II reforms for non-life insurers were completed in 2006 and starting July 2008, all DOFIs in Australia must be authorized by the APRA and operate under its prudential regulatory regime. DMFs are also required to disclose information on a much more rigorous basis. In the long run, APRA intends to harmonize prudential regulations for the life insurance, general insurance and banking sectors.

ICP 24 Intermediaries

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The 2001 Corporations Act and the ASIC policy statements regulate the licensing, management, training, conduct, advice, and fees and commissions of intermediaries. The ASIC enforces these requirements through monetary penalties as well as imprisonment. Intermediaries are also required to keep their clients' funds separate as trust accounts.

ICP 25 Consumer protection

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. AFSL holders and their representatives are required to conduct due care and diligence of their customers and ensure their fair treatment and they are monitored on their conduct by the ASIC. The entities are also required to follow codes of practice established by the industry. A further line of defense for the consumer is provided by the independent complaints resolution scheme and the Insurance Ombudsman Service. Consumers are also provided extensive information on their rights through the ASIC website and a Consumer Education Strategy initiated by the ASIC.

ICP 26 Information, disclosure & transparency towards the market

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. The APRA as well as the ASIC publish market data and analysis extensively, and also make selected regulatory information available to the public through their websites or public inspection of documents. The 2006 FSAP had recommended Australia to push ahead with its Stage II reforms encompassing capital management, reinsurance documentation, corporate governance standards, and disclosure requirements, as the 2008 IMF report mentions. The 2008 report attests that Stage II reforms for non-life insurers were completed in 2006 and starting July 2008, all DOFIs in Australia must be authorized by the APRA and operate under its prudential regulatory regime. DMFs are also required to disclose information on a much more rigorous basis. In the long run, APRA intends to harmonize prudential regulations for the life insurance, general insurance and banking sectors.

ICP 27 Fraud

FC

Australia observes this principle, per the 2006 Detailed Assessment by the IMF. Various laws that address insurance fraud include the Australian Securities and Investments Commission Act, the Corporations Act, and the Insurance Contracts Act. Further, the 1900 Crimes Act of New South Wales and equivalent provisions in the relevant legislation in other state jurisdictions also address insurance fraud. The ASIC can cooperate with foreign supervisory authorities for the enforcement of a foreign business or criminal law through the 1992 Mutual Assistance in Business Regulation Act or the 1987 Mutual Assistance in Criminal Matters Act. However, the assessment observes that regulatory measures to deal with insurance fraud can be improvised upon by designating insurance fraud a punishable offence, making fraud reporting requirements clearer, and facilitating regular interaction and information sharing on fraud among insurers.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

ID

This principle is partly observed, per the IMF's 2006 Detailed Assessment. The IMF Assessment, however, concedes that Australia has already started taking steps to rectify the shortcoming with a new AML legislation in the offing. The IMF based its assessment on the FATF's 2005 mutual evaluation report on Australia, which observed that the 1988 Financial Transaction Reports Act provided for customer due diligence obligations that "do not meet current standards" (p. 1). The supervisor's measures to verify customer identification at financial institutions were found "inadequate" (p. 1) and implementation of the AML/CFT preventative and supervisory system ineffective. The AUSTRAC supervised insurers and insurance intermediaries but had no power to supervise ownership or control of insurers or insurance intermediaries. In response to the IMF assessment, the Australian government declares its commitment to move closer to international standards with respect to this principle and notes that the AML legislation (then expected in 2006) and related reforms in the works, when implemented, "will bring Australia into compliance with the FATF [Financial Action Task Force] recommendations" (IMF 2006a, p. 31).

The 2008 U.S. DoS report also attests that Australia is reforming and "significantly reshaping Australia's AML/CTF regime and bringing it into line with current international best practices" to fulfill its commitment spelled out to the FATF and the IMF. The Anti-Money Laundering and Counter-Terrorism Financing Act, passed in 2006 after the IMF FSSA and later amended in 2007, forms the legislative part of the ongoing reforms. The Act imposes a number of obligations on financial sector institutions, including customer due diligence, reporting obligations, record keeping obligations, and the requirement to establish and maintain an AML/CFT program. The Act introduces risk-based supervision and its obligations will be gradually implemented through December 2008. The AUSTRAC has been conferred with the responsibility of framing AML/CFT rules that detail the operational aspects of the implementation of the Act in consultation with industry. The AUSTRAC has already issued 16 AML/CFT Rules as well as guidance notes for institutions in 2006-2007. The AML/CTF Act aims at gradually and completely replacing the Financial Transaction Reports Act, which will remain operational until all aspects of the new Act are implemented. The new Act will broaden suspicious transaction reporting obligations, and also require reporting of international funds transfers, and transactions valued at more than AUD 10,000. The reporting entities will also be obliged to submit compliance reports detailing their compliance with their AML/CTF Law.

Australia is taking further steps to enhance AML/CFT compliance by the regulated entities, notes the U.S. DoS report. The Minister of Home Affairs introduced three tools in December 2007 to foster AML/CFT compliance. They include "AUSTRAC Online [which] is a secure Internet-based system which assists entities adhere to their reporting and regulatory obligations, and enables them to access their own information; the AUSTRAC Regulatory Guide [which] is an instructional and 'living' document that assists industry to understand and meet their AML/CTF obligations, which will be updated as further AML/CTF Act provisions are implemented; [and] lastly, the AUSTRAC Typologies and Case Studies Report 2007 [which] was published to raise industry awareness regarding potential AML/CTF risk factors, methods and typologies." The AUSTRAC has also been bestowed with additional powers to ensure compliance, including the power to require on-site external compliance audits and regular compliance reports from entities. The AUSTRAC can also initiate monitoring orders, make statutory demands for information and documents, and seek civil penalty orders, remedial directives and injunctions. The AML/CTF Act also stipulates that regulators of the financial sector coordinate to a greater extent than previously mandated. Overall, the U.S. DoS report confirms that Australia is making considerable efforts to meet the revised FATF 40+9 requirements.