Insurance Facts and Figures 2008 Pwc.Com/Au Editor: Kim Smith

2008 facts

figures Insurance and

PricewaterhouseCoopers Insurance facts and figures 2008 pwc.com/au Editor: Kim Smith

Publication Team: Antoinette Chan Melissa Colbert Alexandra Russ Sarah Lane Amy Johnson

Contributors: Alexandra Russ Lisa Simpson Amy Ellison Mark Falvo Amy Johnson Melissa Colbert Andrew McPhail Meera Talwar Angela Linus Nina Woeste Annie Guo Pat Murray Billy Bennett Peter Kennedy Carol Zhang Rajiv Khana Damian Hollingsworth Rebecca Wong Daniel Keating Ruchi Goenka Darren Mack Ruchira Gupta Diego Ascani Saurabh Sah Don Campbell Scott Fergusson Eoin Reville Serge Laville Jason Slade Tim Jenkins Joey Long Vijaya Rajan

This publication is designed to provide an overview of the accounting, tax and regulatory environment relating to insurance. Information contained in this booklet is based on the law and Government announcements as at 15 April 2008.

The information represents a summary of the significant features and should be used as a guide only. Readers are advised that before acting on any matter arising in this publication, they should discuss the situation with a PricewaterhouseCoopers Insurance partner.

Insurance Facts & Figures 2008 © 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.

(“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.)

WL 89399 Regulation and supervision | 2

Insurance facts and figures 2008 Contents

Introduction 2

1 Industry information 3 Top 15 general insurers 4 Top 15 life insurers 6 Top 15 health insurers 8 Top 10 government insurers 10 Investment performance indicators 12 Inflation indicators 14 General insurance 15 Life insurance 20 Health insurance 22

2 Regulation and supervision 25 2.1 Key developments (May 2007 – April 2008) 26 2.2 Framework 37 2.3 Authorisation 41 2.4 Supervision and compliance 47 2.5 Solvency and capital adequacy requirements 62 2.6 Investment policy 72 2.7 Reinsurance 73

3 Policyholder protection 81 3.1 Developments 82 3.2 Framework 82 3.3 Financial services license 83 3.4 Product disclosure, insurance business and insurance contracts 85 3.5 Pricing and competition 87 3.6 Sales practice regulation 89 3.7 Ability to pay claims 90 3.8 Use of personal information 91 3.9 Sources of redress 92

ii | Insurance facts and figures 2008 4 Financial reporting 95 4.1 Developments 96 4.2 Framework 101 • Australian Accounting Standards Board 101 • Australian Securities Exchange 102 • Private Health Insurance Administration Council (PHAIC) 102 • Medicare Australia 102 • Australian Prudential Regulation Authority 104 • Australian Securities And Investments Commission 104 • Life Insurance Actuarial Standards Board (ceased with effect from 31st December 2007) 105 4.3 Accounting standards 105 4.4 Annual accounts 124 4.5 Other returns 127 4.6 Key dates 133

5 Taxation 139 5.1 Developments 140 5.2 Corporate taxation 141 5.3 Personal taxation 150 5.4 Levies and premium taxation 151 5.5 Stamp duty 153 5.6 Key dates 158

6 Insurance legislation 161 6.1 Commonwealth legislation 162 6.2 State and territory legislation 168 6.3 Industry codes 168

7 Insurance directory 169 7.1 Government authorities 170 7.2 Industry associations 174 7.3 Complaints review services 185 7.4 Registered general insurers 187 7.5 Registered life insurers 191 7.6 Registered health insurers 192 7.7 Government insurers 193 7.8 PwC Australian offices and industry experts 194

PricewaterhouseCoopers | iii Glossary

AASB Australian Accounting Standards Board ACCC Australian Competition and Consumer Commission ADI Authorised Deposit-Taking Institution AFSL Australian Financial Services Licence AGAAP Australian Generally Accepted Accounting Priciples AHIA Australian Health Insurance Association AIFRS Australian Equivalents to International Financial Reporting Standards AML Anti-Money Laundering APRA Australian Prudential Regulation Authority ARPC Australian Reinsurance Pool Corporation ASIC Australian Securities and Investments Commission ASX Australian Securities Exchange ATO Australian Tax Office AUASB Auditing and Assurance Standards Board AUSTRAC Australian Transaction Reports and Analysis Centre BCM Business Continuity Management CEO Chief Executive Officer CFO Chief Financial Officer CPI Consumer Price Index CTF Counter-Terrorism Financing CTP Compulsory Third Party DAC Deferred Acquisition Costs DAM Decreasing Adjustment Mechanism DOFI Direct Offshore Foreign Insurer ECS Exceptional Claims Scheme FASB Financial Accounting Standard Board FATF Financial Action Task Force FCR Financial Condition Report FICS Financial Industry Complaint Service FID Financial Information Declaration FSR Financial Services Reform GAAP Generally Accepted Accounting Principles GST Goods and Services Tax HCCS High Cost Claims Scheme HIC Health Insurance Commission (now Medicare Australia)

iv | Insurance facts and figures 2008 HPPA Hospital Purchaser Provider Agreements IAA Institute of Actuaries of Australia IASB International Accounting Standards Board IBD Insurance Brokers Disputes Limited IBNER Incurred But Not Enough Reported IBNR Incurred But Not Reported ICA Insurance Council of Australia IFRS International Financial Reporting Standards ILVR Insurance Liability Valuation Report KYC Know Your Customer LAT Liability Adequacy Test LIASB Life Insurance Actuarial Standards Board LMI Lenders Mortgage Insurers LTHC Life Time Health Cover LVR Loan-to-Value Ratio MAA Motor Accidents Authority MCR Minimum Capital Requirements MDO Medical Defence Organisation MER Maximum Event Retention MII Medical Indemnity Insurer MOU Memorandum of Understanding MSE Management Services Element NIBA National Insurance Brokers’ Association NOHC Non-Operating Holding Company OCR Outstanding Claims Reserve PAIRS Probability and Impact Rating System PDS Product Disclosure Statement PHIAC Private Health Insurance Administration Council PHIO Private Health Insurance Ombudsman PML Probable Maximum Loss PST Pooled Superannuation Trust RAS Reinsurance Arrangement Statement RD Reinsurance Declaration RE Responsible Entity REMS Reinsurance Management Strategy

PricewaterhouseCoopers | RHBO Registered Health Benefits Organisation RMD Risk Management Declaration RMS Risk Management Strategy ROCS Run-off Cover Scheme SEA Segregated Exempt Assets SO Senior Officer from Outside Australia SPV Special Purpose Vehicle Stage 2 Stage 2 of APRA’s general insurance reforms TOFA Taxation of Financial Arrangements UMP SP United Medical Protection Support Payment UPR Unearned Premium Reserve VPST Virtual Pooled Superannuation Trust

vi | Insurance facts and figures 2008 Introduction

PricewaterhouseCoopers | The Turning Point Welcome to the annual PricewaterhouseCoopers’ Insurance Facts and Figures which shows 2007 as the turning point for results in the insurance sector.

Facts and figures A few highlights from the past year: • Whilst the 2007 results remain robust, there was a clear upward trend in loss ratios for the general insurance sector • The life insurance sector continued to show strong results in 2007 albeit the rate of profit growth started to slow • The health insurance sector saw two major insurers demutualise to provide greater access to capital • Overall, all sectors of the insurance industry remain strongly capitalised. These trends will be more pronounced during 2008 as the full impact of increasing claims activity, softening investment markets, and volatility in pricing flow through the industry. Whilst this will mean a more challenging operating environment, the underlying fundamentals of the industry remain strong. I hope you find our 2008 edition of Facts and Figures interesting and informative as you deal with the many challenges ahead.

Kim Smith Australian Insurance Leader PricewaterhouseCoopers

| Insurance facts and figures 2008 1 | Industry information

Top 15 general insurers 4 Top 15 life insurers 6 Top 15 health insurers 8 Top 10 government insurers 10 Investment performance indicators 12 Inflation indicators 14 General insurance 15 Life insurance 20 Health insurance 22

PricewaterhouseCoopers | Top 15 general insurers

Ranking Measure: Performance:

Underwriting Investment Net earned premium Result after tax result result Entity Year Current Prior Prior % Current Prior Current Prior Current Prior end $m $m Rank Change $m $m $m $m $m $m 1 QBE Insurance Group 12/07 10,210 8,158 1 25% 1,438 1,200 1,132 822 1,925 1,483 2 Insurance Australia Group 06/07 6,743 6,132 2 10% 407 533 724 905 629 862 3 Suncorp A 06/07 3,472 2,527 4 37% 460 241 493 446 683 484 4 Allianz Australia 12/07 2,035 1,991 5 2% 103 213 285 243 317 349 5 Wesfarmers 06/07 888 783 6 13% 95 130 72 35 84 87 6 Zurich Australian 12/07 706 700 7 1% (19) 104 157 161 595 232 Insurance 7 Munich Re 12/07 606 521 9 16% 144 96 84 77 161 109 8 Swiss Re 12/07 430 523 8 -18% 44 150 64 66 45 123 9 RACQ 12/06 377 347 10 9% 68 26 48 51 80 54 10 Genworth Financial 12/06 347 191 - 82% 193 161 79 67 176 149 Mortgage Insurance 11 AIG (American Home 12/07 268 225 12 19% 70 62 38 39 58 55 Assurance) 12 Chubb Insurance 12/07 241 245 11 -2% 17 23 20 17 25 27 13 Westpac 09/07 204 182 13 12% 95 84 20 21 73 67 14 ACE Insurance 12/07 179 170 14 5% 21 60 13 17 12 57 15 Commonwealth Insurance 6/07 173 158 - 9% 10 34 9 8 8 26 Limited

Source: Published annual financial statements or Insurance Act Return, including segment reporting for organisations with significant non-general insurance activities

Notes: World wide premium is ranked for those companies/groups based in Australia, while only premium under the control of the Australian operations are included for those with overseas parents. Where a group has significant non-general insurance operations, only performance and position information relating to general insurance is disclosed (subject to availability). In some instances this involves estimating of a notional tax charge for the result after tax. Outstanding claims are net of all reinsurance recoveries.

A Suncorp purchased the Promina Group in March 2007. Comparative figures are for Suncorp only.

| Insurance facts and figures 2008 Industry information | 1

Top 15 general insurers

Ranking Measure: Performance: Financial Position:

Underwriting Investment Outstanding Net earned premium Result after tax Investments Net Assets Total Assets result result claims Entity Year Current Prior Prior % Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior end $m $m Rank Change $m $m $m $m $m $m $m $m $m $m $m $m $m $m 1 QBE Insurance Group 12/07 10,210 8,158 1 25% 1,438 1,200 1,132 822 1,925 1,483 13,871 11,645 23,525 18,915 8,543 6,349 39,613 31,757 2 Insurance Australia Group 06/07 6,743 6,132 2 10% 407 533 724 905 629 862 7,216 6,008 10,884 9,929 4,832 3,761 21,160 16,972 A 3 Suncorp 06/07 3,472 2,527 4 37% 460 241 493 446 683 484 7,150 4,428 10,126 5,307 3,094 2,311 21,377 7,871 4 Allianz Australia 12/07 2,035 1,991 5 2% 103 213 285 243 317 349 3,423 3,337 5,391 5,453 1,722 1,666 8,883 10,669 5 Wesfarmers 06/07 888 783 6 13% 95 130 72 35 84 87 434 323 816 659 1,254 348 3,226 1,563 6 Zurich Australian 12/07 706 700 7 1% (19) 104 157 161 595 232 952 944 1,530 1,320 621 541 2,621 2,357 Insurance 7 Munich Re 12/07 606 521 9 16% 144 96 84 77 161 109 1,082 998 1,694 1,618 476 475 2,564 2,242 8 Swiss Re 12/07 430 523 8 -18% 44 150 64 66 45 123 1,157 1,105 1,384 1,479 456 551 2,059 1,993 9 RACQ 12/06 377 347 10 9% 68 26 48 51 80 54 442 458 707 652 227 172 908 852 10 Genworth Financial 12/06 347 191 - 82% 193 161 79 67 176 149 134 49 1,862 1,439 877 701 2,029 1,588 Mortgage Insurance 11 AIG (American Home 12/07 268 225 12 19% 70 62 38 39 58 55 957 780 709 651 291 256 1,674 1,395 Assurance) 12 Chubb Insurance 12/07 241 245 11 -2% 17 23 20 17 25 27 452 421 676 529 282 257 965 915 13 Westpac 09/07 204 182 13 12% 95 84 20 21 73 67 53 43 - 341 239 200 622 521 14 ACE Insurance 12/07 179 170 14 5% 21 60 13 17 12 57 479 144 295 333 72 167 1,038 962 15 Commonwealth Insurance 6/07 173 158 - 9% 10 34 9 8 8 26 94 86 45 43 46 53 271 265 Limited

Source: Published annual financial statements or Insurance Act Return, including segment reporting for organisations with significant non-general insurance activities

A Suncorp purchased the Promina Group in March 2007. Comparative figures are for Suncorp only.

PricewaterhouseCoopers | Top 15 life insurers

Ranking Measure: Financial Position:

Net Policy Liabilities Solvency Ratio Financial Assets Net Assets Total Assets Held at FV Entity Year Current Prior Prior % Current Prior Current Prior Current Prior Current Prior end $m $m Rank Change $m $m $m $m $m $m 1 AMP 12/07 72,992 67,642 1 8% 1.8 1.7 82,179 77,996 2,710 2,975 97,196 89,159

2 MLC 9/07 52,835 46,240 2 14% 1.7 1.4 63,645 55,757 5,724 5,179 69,244 61,560

3 ING 12/07 29,697 23,253 3 28% 1.6 1.7 28,154 24,815 1,695 1,562 32,440 29,258

4 CommInsure 6/07 19,325 20,272 4 -5% 2.0 2.2 20,888 22,707 1,126 1,298 21,685 24,016

5 AXA 12/07 16,217 16,606 5 -2% 3.4 4.5 24,919 26,919 1,288 1,502 21,190 20,764

6 Westpac 9/07 13,225 12,325 6 7% 3.4 3.4 15,517 14,298 667 588 15,812 14,543

7 Suncorp A 6/07 7,973 3,846 9 107% n/a 2.6 10,786 5,917 2,928 251 13,130 6,163

8 Aviva 12/07 4,598 4,682 7 -2% 4.1 4.7 5,350 5,327 536 481 5,810 5,755

9 Zurich 12/07 3,332 4,213 8 -21% 1.6 1.5 2,483 3,805 465 394 4,068 6,336

10 TOWER 09/07 2,712 2,530 11 7% 2.9 2.9 3,197 2,672 428 294 3,615 3,200

11 Challenger 6/07 2,110 2,138 13 -1% 1.6 1.2 3,837 2,731 1,158 1,279 4,707 5,239

12 Macquarie 3/07 2,075 2,096 14 -1% 3.0 2.7 6,014 5,162 3,852 3,154 6,187 5,479

13 MBF 6/07 1,788 1,497 15 19% 3.9 8.1 1,799 1,461 110 106 2,234 1,792

14 Swiss Re 12/07 665 606 - 7% 1.9 1.9 988 907 294 294 1,075 1,003

15 Hannover 12/07 571 515 - 11% 5.2 3.2 630 601 169 165 804 745

Source: Published annual financial statements, including segment reporting for organisations with significant non-life insurance activities

Notes: World wide net policyholder liabilities is ranked for those companies/groups based in Australia, while only net policyholder liabilities under the control of the Australian operations are included for those with overseas parents. Policyholders liabilities are net of all reinsurance recoveries. Total assets include assets of life insurance statutory funds and shareholders’ funds. Investment revenue includes unrealised gains/losses and investment management expenses. Investments excludes excess of net market value of interests in subsidiaries.

A Suncorp purchased the Promina Group in March 2007. Comparative figures are for Suncorp only.

| Insurance facts and figures 2008 Industry information | 1

Top 15 life insurers

Ranking Measure: Financial Position: Performance:

Net Policy Liabilities Solvency Ratio Financial Assets Net Assets Total Assets Net Insurance Investment Result after tax Held at FV Prem Rev Revenue Entity Year Current Prior Prior % Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior end $m $m Rank Change $m $m $m $m $m $m $m $m $m $m $m $m 1 AMP 12/07 72,992 67,642 1 8% 1.8 1.7 82,179 77,996 2,710 2,975 97,196 89,159 930 896 6,997 10,781 646 699

2 MLC 9/07 52,835 46,240 2 14% 1.7 1.4 63,645 55,757 5,724 5,179 69,244 61,560 788 720 8,354 6,152 1,479 1,184

3 ING 12/07 29,697 23,253 3 28% 1.6 1.7 28,154 24,815 1,695 1,562 32,440 29,258 692 483 2091 1,780 313 219

4 CommInsure 6/07 19,325 20,272 4 -5% 2.0 2.2 20,888 22,707 1,126 1,298 21,685 24,016 690 834 2,840 3,260 153 3,303

5 AXA 12/07 16,217 16,606 5 -2% 3.4 4.5 24,919 26,919 1,288 1,502 21,190 20,764 850 881 1,146 2,196 255 290

6 Westpac 9/07 13,225 12,325 6 7% 3.4 3.4 15,517 14,298 667 588 15,812 14,543 223 190 1,919 1,673 189 141

7 Suncorp A 6/07 7,973 3,846 9 107% n/a 2.6 10,786 5,917 2,928 251 13,130 6,163 219 108 1,042 791 155 61

8 Aviva 12/07 4,598 4,682 7 -2% 4.1 4.7 5,350 5,327 536 481 5,810 5,755 193 156 347 645 72 95

9 Zurich 12/07 3,332 4,213 8 -21% 1.6 1.5 2,483 3,805 465 394 4,068 6,336 89 80 57 62 105 57

10 TOWER 09/07 2,712 2,530 11 7% 2.9 2.9 3,197 2,672 428 294 3,615 3,200 345 210 348 307 33 26

11 Challenger 6/07 2,110 2,138 13 -1% 1.6 1.2 3,837 2,731 1,158 1,279 4,707 5,239 - - 438 376 229 118

12 Macquarie 3/07 2,075 2,096 14 -1% 3.0 2.7 6,014 5,162 3,852 3,154 6,187 5,479 2 2 247 292 396 229

13 MBF 6/07 1,788 1,497 15 19% 3.9 8.1 1,799 1,461 110 106 2,234 1,792 30 28 120 64 9 6

14 Swiss Re 12/07 665 606 - 7% 1.9 1.9 988 907 294 294 1,075 1,003 387 316 58 68 46 76

15 Hannover 12/07 571 515 - 11% 5.2 3.2 630 601 169 165 804 745 396 317 21 22 28 24

Source: Published annual financial statements, including segment reporting for organisations with significant non-life insurance activities

A Suncorp purchased the Promina Group in March 2007. Comparative figures are for Suncorp only.

PricewaterhouseCoopers | Top 15 health insurers

Ranking Measure: Performance:

Contributions Membership Investment Result after tax income

Entity Current Prior Prior % Current Prior Current Prior Current Prior $m $m Rank Change ‘000 ‘000 $m $m $m $m

1 Medibank Private Ltd 3,043 2,799 1 9% 1,434 1,375 147 103 295 200

2 MBF Australia Ltd 2,106 1,991 2 6% 901 900 195 119 254 206

3 BUPA Australia Health Pty Ltd 1,174 1,082 3 9% 490 472 32 26 99 82

4 HCF 965 880 4 10% 442 423 57 49 67 67

5 HBF 743 691 5 8% 381 374 77 57 198 80

6 NIB 666 612 6 9% 329 302 31 4 52 60

7 Australian Unity Health Ltd 425 393 7 8% 184 184 18 23 37 35

8 Australian Health Management Group Ltd 324 282 8 15% 136 120 24 (9) 42 38

9 Teachers Federation Health 223 200 9 11% 86 82 10 8 15 14

10 Manchester Unity Australia Ltd 198 168 10 18% 80 71 6 4 18 12

11 Defence Health Ltd 168 154 11 9% 71 68 11 9 20 15

12 GMHBA Ltd 149 134 12 11% 73 70 10 8 16 13

13 CBHS Health Fund Ltd 146 131 13 11% 59 55 6 4 8 7

14 Westfund Ltd 77 72 14 7% 36 35 5 3 11 11

15 Health Partners 77 70 15 9% 53 32 6 6 8 5

Source: PHIAC Annual Reports 30 June 2007 and 30 June 2006

Notes: Benefits ratio is benefits paid as a proportion of contributions.

| Insurance facts and figures 2008 Industry information | 1

Top 15 health insurers

Ranking Measure: Performance: Financial Position: Ratios

Contributions Membership Investment Result after tax Outstanding Investments Net Assets Total Assets Solvency Benefits Net Margin income Claims

Entity Current Prior Prior % Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior Current Prior $m $m Rank Change ‘000 ‘000 $m $m $m $m $m $m $m $m $m $m $m $m % % % % %

1 Medibank Private Ltd 3,043 2,799 1 9% 1,434 1,375 147 103 295 200 373 341 1,729 1,392 1,143 848 1,960 1,589 3.90 1.61 85% 85% 95.1 96.5

2 MBF Australia Ltd 2,106 1,991 2 6% 901 900 195 119 254 206 256 204 971 799 1,228 1,017 1,774 1,535 1.95 1.48 85% 85% 95.95 95.3

3 BUPA Australia Health Pty Ltd 1,174 1,082 3 9% 490 472 32 26 99 82 124 117 467 485 388 284 696 580 2.10 1.68 82% 83% 90.6 91.5

4 HCF 965 880 4 10% 442 423 57 49 67 67 86 83 625 543 477 401 770 678 4.40 1.93 87% 86% 98 97.3

5 HBF 743 691 5 8% 381 374 77 57 198 80 68 61 311 475 517 342 766 616 3.90 1.58 74% 88% 83.8 96.8

6 NIB 666 612 6 9% 329 302 31 4 52 60 54 55 355 321 336 284 508 433 4.60 2.08 83% 79% 96.9 91.0

7 Australian Unity Health Ltd 425 393 7 8% 184 184 18 23 37 35 39 37 114 91 80 79 242 234 2.65 1.57 79% 73% 90.9 92.7

8 Australian Health Management Group Ltd 324 282 8 15% 136 120 24 (9) 42 38 25 25 78 43 205 163 286 228 3.00 2.20 81% 70% 94.6 83.4

9 Teachers Federation Health 223 200 9 11% 86 82 10 8 15 14 20 18 116 91 115 100 158 143 6.80 2.14 88% 88% 97.6 96.2

10 Manchester Unity Australia Ltd 198 168 10 18% 80 71 6 4 18 12 25 17 52 44 66 46 120 95 2.00 1.27 79% 79% 93.9 95.6

11 Defence Health Ltd 168 154 11 9% 71 68 11 9 20 15 18 17 126 107 106 85 145 124 4.20 2.79 87% 88% 94.5 95.9

12 GMHBA Ltd 149 134 12 11% 73 70 10 8 16 13 12 10 110 92 82 66 133 111 5.30 1.95 86% 87% 96.0 96.0

13 CBHS Health Fund Ltd 146 131 13 11% 59 55 6 4 8 7 14 15 80 68 62 54 91 79 8.40 2.62 91% 90% 98.5 97.5

14 Westfund Ltd 77 72 14 7% 36 35 5 3 11 11 6 5 67 56 58 47 76 64 8.40 2.89 78% 75% 91.7 88.7

15 Health Partners 77 70 15 9% 53 32 6 6 8 5 4 4 41 7 44 34 56 47 7.00 2.59 89% 91% 97.5 100.6

Source: PHIAC Annual Reports 30 June 2007 and 30 June 2006

Notes: Benefits ratio is benefits paid as a proportion of contributions.

PricewaterhouseCoopers | Top 10 government insurers

Ranking Measure: Performance:

Net earned premium Underwriting Investment Result after tax

Entity Year end Current Prior Prior % Current Prior Current Prior Current Prior $m $m Rank Change $m $m $m $m $m $m

1 WorkCover NSW 06/07 2,520 2,925 1 -14% 33 2,110 935 928 727 2,064

2 Victorian WorkCover 06/07 1,641 1,668 2 -2% 355 226 1,454 1,338 1,170 1,003 Authority

3 Transport Accident 06/07 1,071 1,021 3 5% 13 (112) 957 943 691 604 Commission (Vic)

4 WorkCover Queensland 06/07 815 861 5 -5% (324) 576 411 373 65 669

5 NSW Self Insurance 06/07 790 930 4 -15% 678 568 553 601 (70) (175) Corporation A

6 WorkCover Corporation (SA) 06/07 572 544 6 5% (238) (116) 167 150 (149) (42)

7 Motor Accident Commission 06/07 386 386 7 0% (94) (64) 192 170 98 106 (SA)

8 Insurance Commission 06/07 345 352 8 -2% (56) (42) 475 330 243 171 of WA

9 Comcare (Cwlth) A 06/07 229 212 9 8% (76) (76) 14 9 44 35

10 Victorian Managed Insurance 06/07 135 126 10 7% (12) (62) 128 108 114 45 Authority

SOURCE: Published annual financial statements

NOTES: Outstanding claims are net of all reinsurance recoveries.

A Underwriting result has not been disclosed in financial statements and is derived as net earned premium less net claims incurred.

10 | Insurance facts and figures 2008 Industry information | 1

Top 10 government insurers

Financial Position:

Outstanding Investments Net Assets Total Assets claims

Current Prior Current Prior Current Prior Current Prior $m $m $m $m $m $m $m $m

9,385 8,344 10,646 9,124 812 85 12,499 10,719

7,721 7,897 10,806 9,608 2,656 1,485 11,221 10,012

5,613 5,494 7,719 7,085 1,422 1,033 8,089 7,399

1,566 1,357 3,008 2,977 1,470 1,392 3,235 3,169

4,120 4,302 4,871 4,950 849 925 5,287 5,723

2,255 1,854 1,377 1,130 (844) (694) 1,546 1,288

1,520 1,436 2,081 1,893 424 326 2,138 1,956

1,317 1,283 2,125 1,792 876 577 2,741 2,285

1,586 1,438 0 0 115 71 2,653 2,336

747 640 1095 830 313 199 1175 903

PricewaterhouseCoopers | 11 Investment performance indicators

Shares * Govt Bonds ** Property ***

All Ordinaries S&P / ASX 200 Australian bond index Direct property index Year Index Annual % change Index Annual % change Index Annual % change Index Annual % change

1980 629 -4.6 2.858 14.3

1981 700 11.3 3.312 15.9

1982 473 -32.4 3.991 20.5

1983 605 27.9 4.628 16.0

1984 659 8.9 5.348 15.6

1985 861 30.6 6.164 15.3

1986 1180 37.1 7.056 14.5

1987 1765 49.6 8.342 18.2

1988 1555 -11.9 1020 10.764 29.0

1989 1521 -2.2 1081 5.9 13.500 25.4

1990 1501 -1.3 1248 15.5 15.273 13.1

1991 1506 0.4 1525 22.2 14.153 -7.3

1992 1645 9.2 1666 – 1854 21.5 12.413 -12.3

1993 1738 5.7 1735 4.1 2109 13.8 11.157 -10.1

1994 1989 14.4 1931 11.3 2066 -2.0 11.520 3.3

1995 2017 1.4 1981 2.6 2308 11.7 12.596 9.3

1996 2242 11.2 2172 9.6 2528 9.5 13.452 6.8

1997 2726 21.6 2665 22.7 2954 16.9 14.563 8.3

1998 2668 -2.1 2620 -1.7 3287 11.3 16.011 9.9

1999 2969 11.3 2904 10.8 3389 3.1 17.280 7.9

2000 3258 11.5 3311 14.0 3599 6.2 18.896 9.3

2001 3425 5.4 3490 5.4 3849 7.0 20.748 9.8

2002 3163 -7.9 3216 -7.9 4081 6.0 22.480 8.3

2003 3000 -5.2 3026 -5.9 4487 9.9 24.800 10.3

2004 3530 17.7 3533 12.9 4571 1.9 27.334 10.2

2005 4230 19.8 4278 21.1 4939 8.1 31.016 13.5

2006 5034 19.0 5074 18.6 5069 2.6 37.011 19.3

2007 5816 13.5 5833 14.9 5223 3.0 41.480 12.1

2008 5410 -7.0 5356 -8.2 5546 6.2 48.802 17.7

Notes: * Source: Bloomberg as at 30 June; Reserve Bank of Australia Bulletin, Table F7. New All Ordinaries index from April 2000. Latest 31 March 2008 ** Source: UBS Warburg Treasury Bond Index (Bloomberg). Latest February 2007 *** Source: InTech Management Pty Limited Property Index. Latest March 2008 **** Source: Reserve Bank of Australia Bulletin, Tables F2, F4 and F5 as at 30 June. Latest 31 March 2008

12 | Insurance facts and figures 2008 Industry information | 1

Investment performance indicators

Shares * Govt Bonds ** Property *** Debt securities ****

All Ordinaries S&P / ASX 200 Australian bond index Direct property index 2/3 year bond (a) 10 year bond Debentures 2 years Debentures 3 years (b) Housing loans Year Index Annual % change Index Annual % change Index Annual % change Index Annual % change % % % % % Year

1980 629 -4.6 2.858 14.3 11.50 11.76 11.50 12.25 9.88 1980

1981 700 11.3 3.312 15.9 13.20 13.10 14.25 14.75 11.50 1981

1982 473 -32.4 3.991 20.5 16.40 16.40 16.75 17.00 13.50 1982

1983 605 27.9 4.628 16.0 13.70 14.70 13.50 14.00 12.50 1983

1984 659 8.9 5.348 15.6 12.20 13.75 2.75 14.00 11.50 1984

1985 861 30.6 6.164 15.3 13.45 13.50 13.75 13.50 12.00 1985

1986 1180 37.1 7.056 14.5 12.80 12.95 13.88 13.25 15.50 1986

1987 1765 49.6 8.342 18.2 13.00 12.80 13.98 14.00 15.50 1987

1988 1555 -11.9 1020 10.764 29.0 11.70 11.95 11.83 11.85 13.50 1988

1989 1521 -2.2 1081 5.9 13.500 25.4 15.40 13.50 15.38 15.15 17.00 1989

1990 1501 -1.3 1248 15.5 15.273 13.1 14.05 13.40 14.30 14.15 16.50 1990

1991 1506 0.4 1525 22.2 14.153 -7.3 10.55 11.17 10.20 10.50 13.00 1991

1992 1645 9.2 1666 – 1854 21.5 12.413 -12.3 7.04 8.90 7.43 8.35 10.50 1992

1993 1738 5.7 1735 4.1 2109 13.8 11.157 -10.1 6.22 7.37 5.93 6.55 9.50 1993

1994 1989 14.4 1931 11.3 2066 -2.0 11.520 3.3 8.61 9.63 6.70 7.25 8.75 1994

1995 2017 1.4 1981 2.6 2308 11.7 12.596 9.3 8.27 9.21 7.75 7.85 10.50 1995

1996 2242 11.2 2172 9.6 2528 9.5 13.452 6.8 8.33 8.88 7.60 7.85 9.75 1996

1997 2726 21.6 2665 22.7 2954 16.9 14.563 8.3 5.93 7.05 5.50 5.90 7.20 1997

1998 2668 -2.1 2620 -1.7 3287 11.3 16.011 9.9 5.25 5.58 5.35 5.35 6.70 1998

1999 2969 11.3 2904 10.8 3389 3.1 17.280 7.9 5.63 6.27 5.05 5.45 6.50 1999

2000 3258 11.5 3311 14.0 3599 6.2 18.896 9.3 5.97 6.16 6.30 6.40 7.80 2000

2001 3425 5.4 3490 5.4 3849 7.0 20.748 9.8 5.55 6.04 5.20 5.45 6.80 2001

2002 3163 -7.9 3216 -7.9 4081 6.0 22.480 8.3 5.61 5.99 5.45 5.60 6.55 2002

2003 3000 -5.2 3026 -5.9 4487 9.9 24.800 10.3 4.47 5.01 4.10 4.20 6.55 2003

2004 3530 17.7 3533 12.9 4571 1.9 27.334 10.2 5.43 5.87 5.55 5.45 7.05 2004

2005 4230 19.8 4278 21.1 4939 8.1 31.016 13.5 5.10 5.11 5.35 5.40 7.30 2005

2006 5034 19.0 5074 18.6 5069 2.6 37.011 19.3 5.78 5.79 5.97 5.90 7.55 2006

2007 5816 13.5 5833 14.9 5223 3.0 41.480 12.1 5.93 5.69 6.20 6.20 8.05 2007

2008 5410 -7.0 5356 -8.2 5546 6.2 48.802 17.7 6.14 6.04 9.35 2008

PricewaterhouseCoopers | 13 Inflation indicators

Wages * Prices **

Average weekly Average weekly earnings Consumer Price Index Year ordinary times earnings $ Annual % change $ Annual % change Annual % change

1980 248.8 10.8

1981 280.1 12.5 278.5 8.7

1982 326.1 12.6 324.8 16.6 10.8

1983 365.1 16.4 346.0 6.5 11.1

1984 398.1 12.0 375.3 8.5 4.0

1985 423.1 9.0 396.9 5.8 6.6

1986 455.2 6.3 427.2 7.6 8.5

1987 479.7 7.6 450.1 5.4 9.3

1988 520.2 5.4 484.9 7.7 7.1

1989 553.8 8.4 516.6 6.5 7.6

1990 590.6 6.5 555.6 7.5 7.7

1991 610.7 6.6 578.8 4.2 3.4

1992 621.0 3.4 586.8 1.4 1.2

1993 642.5 1.7 604.2 3.0 1.9

1994 671.6 3.5 629.2 4.1 1.7

1995 702.9 4.5 659.9 4.9 4.5

1996 730.2 4.7 685.6 3.9 3.1

1997 753.2 3.9 711.3 3.7 0.3

1998 784.9 3.1 741.3 4.2 0.7

1999 805.0 4.2 763.2 3.0 1.1

2000 838.9 2.6 802.5 5.1 3.2

2001 885.4 4.2 848.7 5.8 6.0

2002 931.5 5.5 889.6 4.8 2.8

2003 987.3 5.2 938.4 5.5 2.7

2004 1027.3 6.0 976.4 4.0 2.5

2005 1078.5 4.1 1025.7 5.0 2.5

2006 1107.1 5.0 1058.6 3.2 4.0

2007 1160.0 2.7 1108.5 4.7 2.1

Notes: * Source: Australian Bureau of Statistics, 6302.0 Average Weekly Earnings, time series for the year ended 30 November Based on all persons. Prior to 1983 data represents total male earnings only. Note that from October 1981 onwards the survey methodology was changed. Estimates are not comparable with earlier periods.

** Source: Australian Bureau of Statistics, 6401.0 Consumer Price Index for the year ended 30 June 2007 data based on December quarter 2007.

14 | Insurance facts and figures 2008 Industry information | 1

We have not included 31 December 2002 data General insurance as APRA has not published statistics for this period. For 2002, only June data available. Direct insurers Comparison of profitability – Year ended 31 December Profit after tax/net assets 10 year bond return 25

% 10

-5 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Loss and expense ratios – Year ended 31 December Net loss ratio Underwriting expense ratio Net U/W combined ratio

120 Combined ratio 110 100 90 80 Loss ratio 70 % 60 50 40 Expense ratio 30 20 10 0 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Distribution of investments by sector

Property, loans, advances & other 15%

Indirect investments 10%

Equity 8% Interest 67%

Annual movement in investments Annual % Change in proportional investment holdings 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% Interest Equity Indirect investments Property, loans, advances & other Source: Selected statistics on general insurance industry, APRA, December 2007

PricewaterhouseCoopers | 15 We have not included 31 December 2002 data Reinsurers as APRA has not published statistics for this period. For 2002, only June data available.

Comparison of profitability – Year ended 31 December Profit/loss as % net assets 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

Loss and expense ratios – Year ended 31 December

Net loss ratio Underwriting expense ratio Net U/W combined ratio 160

140

120 Combined ratio 100

80 % Loss ratio 60

40 Expense ratio

-20 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

Distribution of investments by sector Indirect investments Property, loans, 2% advances & other 7% Equity 4%

Interest 87% Annual movement in investments 1.50% Annual % change in proportional investment holdings 1.00%

0.50%

0.00%

-0.50%

-1.00%

-1.50% Interest Equity Indirect investments Property, loans, advances & other Source: Selected statistics on general insurance industry, APRA, December 2007

16 | Insurance facts and figures 2008 Industry information | 1

We have not included 31 December 2002 data Total private sector as APRA has not published statistics for this period. For 2002, only June data available.

Comparison of profitability – Year ended 31 December Profit after tax/net assets 10 year bond return 25

10 % 5

-5

-10 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

Loss and expense ratios – Year ended 31 December Net loss ratio Underwriting expense ratio Net U/W combined ratio 120 Combined ratio 110 100 90 80 Loss ratio 70 % 60 50 40 Expense ratio 30 20 10 0 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Jun-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Distribution of investments by sector Property, loans, advances & other 14% Indirect investments 9%

Equity 7%

Interest 70%

Annual movement in investments

Annual % change in proportional investment holdings 0.60% 0.40% 0.20% 0.00% -0.20% -0.40% -0.60% -0.80% -1.00% Interest Equity Indirect investments Property, loans, advances & other Source: Selected statistics on general insurance industry, APRA, December 2007

PricewaterhouseCoopers | 17 Major Australian catastrophes Original cost adjusted to June 2006 CPI

2007* NSW east coast storm and flood event, 2007, $1378m Severe Hailstorm Sydney, 2007, $205m 2006* Tropical Cyclone Larry, QLD, 2006, $367m Crop damage: Goulburn Valley, VIC, 2006, $71m 2005 Hailstorms Gold Coast, 2005, $62m Hail, Storm, Winds NSW, TAS, VIC, 2005, $220m 2003 Hail, storm Melbourne metro, 2003, $132m Bushfires Canberra, 2003, $373m 2001 Bushfires Sydney and NSW, 2001, $78m 1999 Hailstorms Sydney, 1999, $2093m 1998 Hailstorms, Brisbane, $95m Floods (excl. Cyclone Les) NT, 1998, $87m Cyclone "Sid" and floods QLD, 1998, $88m 1996 Hailstorms Singleton NSW, 1996, $62m Hailstorms Armidale/Tamworth NSW, 1996, $131m 1994 Bushfires NSW, 1994, $79m 1992 Storms Sydney, 1992, $166m 1991 Storms Sydney, 1991, $321m 1990 Flood and wind from Cyclone Joy Qld, 1990/1, $110m Cyclone Nancy, Qld/NSW, 1990/1, $62m Hailstorms Sydney, 1990, $564m 1989 Earthquake Newcastle, 1989, $1364m 1986 Hailstorms Western Sydney, 1986, $207m Storms and floods Sydney, 1986, $70m Cyclone Winifred, QLD, 1986, $80m 1985 Hailstorms Brisbane, 1985, $389m 1984 Bushfires NSW, 1984/5, $58m Floods NSW, 1984, $184m 1983 Ash Wednesday Bushfires SA & VIC, 1983, $421m 1981 Storms and floods Dalby QLD, 1981, $59m 1978 Storms Eastern NSW, 1978, $58m 1977 Thunderstorms NSW, 1977, $63m 1976 Cyclone Ted Qld, 1976, $71m Hailstorms NSW, 1976, $189m 1975 Cyclone Joan, WA, 1975, $106m Floods, Sydney, 1975, $80m 1974 Cyclone Tracy, Darwin, 1974, $1240m Cyclone Wanda, Brisbane, 1974, $421m

2500 2000 1500 1000 500 0 A ($m)

Source: Insurance Disaster Response Organisation, Major disaster event list since June 1967. Revised to March 2006.* Source: Emergency Management Australia, EMA Disasters Database. 28 April 08

18 | Insurance facts and figures 2008 Industry information | 1

World catastrophes The 40 most costly insurance losses 1970 – 2007

2007** Winter storm Kyrill, Europe Floods caused by heavy rain, UK Floods caused by heavy rain, UK 2005 Hurricane Wilma; torrential rain, floods, US, $13.0bn Hurricane Rita; floods, damage to oil rigs, US, $10.4bn Hurricane Katrina, US, $66.3bn 2004 Seaquake; tsunamis in Indian Ocean, $2.1bn Hurricane Jeanne; floods, landslides, US & Carribean, $4.0bn Typhoon Songda, Japan & Sth Korea, $3.8bn Hurricane Ivan; damage to oil rigs, US, $13.7bn Hurricane Frances, US & Bahamas, $5.5bn Hurricane Charley, US & Carribean, $8.6bn 2003 Hurricane Isabel, US, $2.3bn Thunderstorms, tornadoes, hail, US, $3.5bn 2002 Severe floods across Europe, Europe, $2.6bn 2001 Terrorist attacks on WTC, Pentagon etc, US, $21.4bn Tropical storm Allison; rain, floods, US, $4.1bn Hail, floods & tornados, US, $2.5bn 1999 Winter storm Martin, France & Spain, $2.9bn Winter storm Lothar over Western Europe, $7.0bn Winterstorm Anatol, Western/Northern Europe, $2.3bn Typhoon Bart, South Japan, $4.9bn Hurricane Floyd, Eastern US, Bahamas & Caribbean, $3.4bn 1998 Hurricane Georges, US, Carribean, $4.4bn 1997 Floods after heavy rain in Central Europe, $2.0bn 1996 Hurricane Fran, US, $2.3bn 1995 Hurricane Opal, US, $3.3bn Rain, floods and landslides $2.1 bn Great Hanshin earthquake in Kobe, Japan, $3.3bn 1994 Northridge earthquake, US, $19.0bn 1993 Blizzards, tornadoes, US, $2.7bn 1992 Hurricane Iniki, US, $2.3bn Hurricane Andrew, US, $23.0bn 1991 Forest fires which spread to urban areas, drought, US, $2.5bn Typhoon Mireille, Japan, $8.4bn 1990 Winter storm Vivian, Europe, $4.9bn Winter storm Daria, Europe, $7.2bn 1989 Explosion in a petrochemical factory, US, $2.2bn Hurricane Hugo, Puerto Rico, $7.4bn 1988 Explosion on the Piper Alpha oil rig, UK, $3.4bn 1987 Storms and floods in Europe, $5.5bn 1979 Hurricane Frederic, US, $2.2bn 1974 Tropical cyclone Fifi, Honduras, $2.0bn

70,00 60,00 50,00 40,00 30,00 20,00 010,00 A ($bn) Source: Swiss Re, Natural catastrophes and man-made disasters. 1970 – 2005, Sigma no.2/2006 * USD converted to AUD using exchange rate of $A1 = $US0.7915, 31 December 2005 Source: Selected statistics on general insurance industry, APRA, December 2005 ** Source: SWISS Re, Natural catastrophes and man-made disasters in 2007, Sigma 1/2008 For 2007 figures – USD converted to AUD using exchange rate of $A1= $US0.87806, 31 December 2007

PricewaterhouseCoopers | 19 Life insurance Total premiums

$b Single Annual in force 45

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Superannuation and ordinary premiums (in force)

% Ordinary Superannuation 100

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Single premiums

$b Ordinary Superannuation 40

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: APRA Life Insurance Market Statistics, June 2007

20 | Insurance facts and figures 2008 Industry information | 1

New annual premiums

$b Ordinary Superannuation 2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Average annual premiums in force

$b Ordinary Superannuation 9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: APRA Life Insurance Market Statistics, June 2007

PricewaterhouseCoopers | 21 Health insurance Percentage of persons with private health insurance by state

60%

50%

40%

30%

20%

10%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Financial trends

12,000

10,000

8,000

6,000

4,000

2,000 Single premiums

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Comparison of profitability Profit before tax/net assets 10 year bond return 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: PHIAC, Operators of the registered health benefits organisations, 2006-07

22 | Insurance facts and figures 2008 Industry information | 1

Loss and expense ratios

120%

Combined ratio 100%

Loss ratio 80%

60%

40%

20% Management Expenses as % contribution income

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: PHIAC, Operators of the registered health benefits organisations, 2006-07

PricewaterhouseCoopers | 23 2 | Regulation and supervision

2.1 Key developments (May 2007 – April 2008) 26 2.2 Framework 37 2.3 Authorisation 41 2.4 Supervision and compliance 47 2.5 Solvency and capital adequacy requirements 62 2.6 Investment policy 72 2.7 Reinsurance 73

PricewaterhouseCoopers | 25 2.1 Key developments (May 2007 – April 2008)

General Insurance

Refinements to the prudential framework The Government has enacted its policy with regard to Direct Offshore Foreign Insurers (DOFIs). From 1 July 2008, all insurers seeking to carry on general insurance business in Australia, whether directly or through the actions of an intermediary (e.g. an agent or a broker), are required to become authorised under the Insurance Act 1973 (Insurance Act). This general position is subject to limited exemptions. APRA is also taking the opportunity to make minor changes to existing prudential standards to clarify their intent. The main change is that the current Prudential Standard GPS 110 Capital Adequacy (GPS 110) has been divided into a number of separate standards covering distinct elements of capital adequacy. APRA’s 31 July 2007 discussion paper Refinements to the General Insurance Prudential Framework invited submissions on the proposals set out in that paper. In the Response to submissions Refinements to the General Insurance Prudential Framework released on 19 December 2007, APRA proposed modifications and clarifications to its prudential framework to give effect to the Government’s announcement on 3 May 2007 in relation to DOFIs and, more generally, to recognise different categories of insurer based on risk profiles. Insurers affected by these proposals and by changes to the Insurance Act more generally are: • all existing APRA-authorised insurers; • DOFIs that intend to become APRA-authorised insurers; • Australian-owned sole parent captive insurers that are not APRA-authorised; and • Australian-owned association captive insurers that are not APRA-authorised.

26 | Insurance facts and figures 2008 Regulation and supervision | 2

On 2 April 2008, APRA finalised its package of General Insurance refinements. The components of the package that were unchanged from the Response to submissions Refinements to the General Insurance Prudential Framework 2007, are summarised below.

Components Description

Capital requirements: • Reinsurance recoverables from non-APRA-authorised reinsurers on outstanding claims provisions which are not supported by suitable security arrangements in Australia to be subject to 100 per cent capital factor one year after the end of the financial year in which the claims giving rise to the recoverables occur. Reinsurance recoverables • Any guarantees or letters of credit provided as security arrangements in Australia to be provided by an authorised deposit-taking institution (ADI). Transitional arrangements: • For reinsurance contracts entered into before 30 June 2008, no additional capital charges to apply until 30 June 2012 with the full 100 per cent capital factor not applying until 30 June 2013.

Reinsurance contractual requirements for arrangements entered into on or after 30 June 2008: • Reinsurance contracts to be subject to Australian law with any disputes to be heard in an Australian court. Reinsurance contracts • Reinsurance recoverables to be payable to the insurer in Australia and no other payment mechanism to be substituted for convenience. These requirements would not apply to contracts entered into before 30 June 2008.

• The existing investment risk capital factors applying to reinsurance Investment capital factors on assets to be increased by 50 per cent for reinsurance assets from reinsurance assets non-APRA-authorised reinsurers (e.g. apply 3 per cent instead of 2 per cent for grade 1 & 2 reinsurers).

• With the imminent implementation of insurance group supervision, the current temporary concessions on intra-group reinsurance Intra-group reinsurance exposures to be discontinued from 30 June 2008. • Transitional arrangements to be considered for the insurance groups affected on a case-by-case basis.

• The definition of each category of insurer to be incorporated in a new definitional standard (GPS 001). • A captive reinsurer of an insurance group to be recognised as a Categories of insurer Category E insurer. • Definition of a Category B insurer to include certain non-wholly owned subsidiaries (e.g. controlled entities).

Source: Response to submissions Refinements to the General Insurance Prudential Framework, APRA 19 December 2007

PricewaterhouseCoopers | 27 Components Description

• A run-off plan for a run-off insurer to replace the business plan and financial condition report (FCR). • Run-off plan to be prepared by the insurer on a rolling three-year basis. Run-off plan • An appointed actuary to review the run-off plan and make comments where necessary. • A run-off plan and the role of the actuary in respect of the run-off plan to address the matters specified.

• Co-signatory requirements for assets held by a custodian to allow an agent to delegate authority to an authorised person resident in Australia. Assets in Australia • Where co-signatory arrangements are in place with a foreign insurer, the agent in Australia (or an authorised delegate who is resident in Australia) to maintain authority to issue final instructions to the custodian.

• The capital buffer for Category D and category E insurers to be 1.5 times their minimum capital requirements. The buffer for all other Capital buffer insurers generally expected to be 1.2 times their minimum capital requirements.

• The eligibility criteria applied to capital instruments clarified. Harmonised capital adequacy • APRA’s supervisory discretion over the composition of an insurer’s capital base modified (and varied from the original proposal).

• Insurers to apply investment capital factors of 25 per cent for listed equity instruments and units in listed trusts. • Insurers to apply investment capital factors of 30 per cent for unlisted equity instruments and units in unlisted trusts. Investment capital factors for • Insurers to apply investment capital factors of 30 per cent for direct equity and real property holdings of real estate property investments. • Insurers to be able to treat investments in unit trusts on a ‘look through’ basis where it is administratively practical to do so. • The investment capital factors to apply to net exposures after allowing for equity derivatives.

• APRA to recognise Kangaroo Bonds as assets in Australia subject to Kangaroo Bonds certain criteria.

• Claims development table to be more consistent with AASB requirements. • Investment income to be allocated between shareholders and APRA reporting requirements policyholders. • Data on bound but not incepted business, unearned premium provisions and deferred reinsurance expense to be supplied.

Source: Response to submissions Refinements to the General Insurance Prudential Framework, APRA 19 December 2007

28 | Insurance facts and figures 2008 Regulation and supervision | 2

Components Description

• Investments held by foreign sub-custodians not to be Sub-custodian arrangements recognised as assets in Australia.

Small insurers • Transition to full actuarial requirements for small insurers that – actuarial requirements grow in size to be progressive.

Small insurers • Small insurers to be able to use accounting data as – APRA reporting approximations for APRA reporting purposes.

• Cession limits to be 90 per cent for captive insurers and 60 per cent for other categories. Cession limits • Insurance group captives to cede up to 90 per cent, as they will be Category E insurers. APRA authorised subsidiaries should not cede more than 60 per cent to the group captive.

• International group actuary who is not an Australian resident can International group actuaries be appointed.

• Group business plans can be used in place of local entity Group business plans business plans.

• Corporate agents to have at least three directors on their Corporate Agents boards.

Outsourcing to related parties • Outsourcing arrangements to related parties of association – Category D insurers captives to be formalised.

Loans back to parents • Loans to parents of sole parent captive insurers to be available – Category E insurers up to 100 per cent of capital base.

• Alternative governance arrangements to be available for sole Governance parent captive insurers by exempting them from the requirement – Category E insurers for a majority of independent directors.

SRR Act (Financial Sector • Minor consequential amendments to be made flowing from Amendment – Simplifying SRR Act. Most significant is the removal of the requirement for Regulation and Review – APRA’s approval of auditors and actuaries. These procedural act 2007) amendments have no real impact on prudential requirements.

Two areas that were refined as a result of the submissions related to foreign reinsurance recoverables and investment capital factors for property and equities. 1. Foreign reinsurance recoverables In response to industry submissions, APRA has decided to take an approach to foreign reinsurance recoverables that is more risk-based than previously proposed. Past reinsurance arrangements will be ‘grandfathered’ so that no reinsurance recoverables arising from reinsurance contracts entered into before 31 December 2008 will be affected. No additional capital requirements will be applied to such recoverables (other than the credit risk counterparty capital charges). APRA’s previous proposal would have applied a five-year transition period to recoverables in respect of existing reinsurance contracts.

PricewaterhouseCoopers | 29 With regard to future reinsurance arrangements, a risk-based scale of capital factors will be applied to unsecured recoverables arising from new reinsurance contracts commencing on or after 31 December 2008. After the grace period (i.e. on and after the second balance date after a claim event has occurred) a higher capital factor will apply to unsecured reinsurance recoverables based on the ratings of the reinsurers concerned, as set out in the table below.

Counterparty Capital Factor Grade – Foreign Reinsurance

1 20%

2 40%

3 60%

4 100%

5 100%

These counterparty grades are as set out in Attachment B to Draft Prudential Standard GPS114 Investment Capital Charge. As an example, using the Standard & Poor’s rating scale, Grade 1 corresponds to AAA rated risks, Grade 2 comprises risks rated from AA+ to AA-, Grade 3 comprises risks rated from A+ to A-, Grade 4 comprises risks rated from BBB+ to BBB- and Grade 5 comprises risks rated BB+ and below. APRA includes unrated risks in Grade 4. APRA will have the ability, where a reinsurer does not have an external rating (e.g. intra-group reinsurers) or where APRA has any other reason to make its own assessment, to determine the credit grade against which exposure to that reinsurer should be assessed. The previous position was that all unrated reinsurers would be treated as Grade 4 counterparties. APRA will introduce, however, additional controls in relation to the assessment of recoverables under both existing and new reinsurance contracts. APRA will require closer consideration by reinsurance administration and accounting staff within companies, and by both appointed auditors and appointed actuaries, of the quality of all reinsurance recoverables for which credit is being taken on the insurer’s balance sheet. To give effect to this approach, APRA will expect to see more explicit attestations from the appointed actuary, management and the board as to the value of the insurer’s reinsurance recoverables at each balance date.

2. Investment capital factors for property and equities The capital factors for some classes of investments will be changed from 1 July 2008. The new factor for listed equities will be 16 per cent compared to 8 per cent currently. For unlisted equities, direct property and investments classified as ‘other’, the new factor will be 20 per cent in place of the current 10 per cent.

30 | Insurance facts and figures 2008 Regulation and supervision | 2

As already proposed in December 2007, insurers will be able to treat investments in unit trusts on a ‘look through’ basis where it is administratively practical to do so and will be able to apply the capital factor for equities to net exposures after allowing for derivative positions. Industry respondents supported the APRA view that the existing factors of 8 per cent for listed equities and 10 per cent for unlisted equities and property are too low but submitted that APRA’s proposed factors of 25 per cent and 30 per cent respectively should not be applied. APRA will consider further changes to the capital required to be held for equity and property investment risks as part of a wider MCR recalibration project to be undertaken in 2009.

Prudential standards for conglomerate supervision APRA is proceeding to develop a regulatory framework for consolidated supervision of insurance groups (referred as level 2 supervision). Development of conglomerate supervision for groups involved in more than one prudentially regulated industry (level 3 supervision) will be considered by APRA at a future date. The proposed consolidated supervision framework aims to close a gap in the prudential supervision of authorised general insurers that operate within a corporate group. This will better protect the interests of policyholders. The proposed framework will require general insurers and their corporate group to meet various requirements on a consolidated basis. The framework will also address contagion risk posed to the insurer(s) in the group from group activities and intra-group relationships. Implementation of reporting standards and forms is expected in 2009. The most notable change to the reporting framework considered in APRA’s discussion paper (Consolidated Group Reporting for General Insurers, 31 August 2007) is that the level 2 insurance group reporting framework will be based on the consolidated financial accounts of the highest parent entity in a group structure that is an Australian authorised general insurance entity (ie, an APRA-authorised insurer or an APRA-authorised NOHC). The proposed prudential requirements are summarised in the table below (APRA Paper Response to Submissions, Prudential Supervision of General Insurance Groups, 15 April 2008):

Prudential Standard Description

• The Level 2 group would be treated as one consolidated entity. Principles applicable to all standards • Overseas subsidiaries of an Australian general insurance group would not be required to satisfy APRA’s requirements on an individual basis.

• A Level 2 general insurance group would be headed by either a Level 1 insurer (an operating holding company) or an APRA-authorised NOHC. It would contain all general insurance subsidiaries (both domestic and international) and any other controlled entities integral to its general Draft Prudential insurance business including related service entities. Standard GPS 001: Definitions • Material subsidiaries operating in other industries, unrelated to the general insurance business, would need to be deconsolidated from the Level 2 general insurance group. • Transition arrangements would apply to newly acquired subsidiaries.

PricewaterhouseCoopers | 31 Prudential Standard Description

• The MCR would be determined using prudential requirements similar to those currently applying to Level 1 general insurers. • The MCR of the Level 2 group would be determined using the prescribed approach or via an internal model. • Responsibility for capital management would rest with the Board of directors of the parent entity. • The value of non-consolidated subsidiaries would be deducted from the Level 2 group’s capital base. • APRA would be able to deduct from capital an amount to cover any deficiency in an undercapitalised non-consolidated subsidiary. • The capital base would be assessed on a group basis. The effect of Draft Prudential intra-group transactions would be assessed at the group level. This may Standard GPS 111 result in eligible capital instruments within entities of the Level 2 general Capital Adequacy: insurance group being excluded from the capital base of the group as Level 2 insurance group a whole. • In cases where the treatment of a capital instrument differs between APRA and local regulators such that the capital instrument is downgraded by APRA, individual subsidiaries would not be required to hold additional capital at the entity level. • Some requirements that apply to Level 1 general insurers would not be imposed on the Level 2 general insurance group with respect to the business of overseas subsidiaries. • APRA would not prescribe where the surplus capital of the group can be held. • Level 1 general insurers within the group would still be required to meet the MCR on an individual basis.

• A group-wide risk management framework would be required, which includes reinsurance management, business continuity management and policies relating to outsourcing arrangements. The requirements are based on the principles applying to Level 1 general insurers but are appropriately modified for application at the group level. Draft Prudential • The risk management requirements would be flexible and principles- Standard GPS 221 Risk based; they are not expected to conflict with local requirements in foreign Management: Level 2 jurisdictions. insurance group • Level 1 insurers within the group would not have to satisfy the risk management requirements on an individual basis if the Level 2 group can satisfy these requirements. • There would be no requirement to complete a reinsurance declaration for the group.

32 | Insurance facts and figures 2008 Regulation and supervision | 2

Prudential Standard Description

• The Level 2 group would need to appoint a Group Auditor and Group Actuary. • The Group Auditor may be the Appointed Auditor of any Level 1 insurer within the group or, a responsible auditor of the authorised NOHC. • The Group Actuary may be the Appointed Actuary of any Level 1 insurer within the group or where the parent entity is a NOHC, an actuary who is responsible for providing actuarial services to the Board of the NOHC, including reporting to the Board of the NOHC on actuarial matters relating to the group. • Semi-annual reporting would be required. Initially, reports would need to be submitted to APRA within twelve weeks of balance date. • The Level 2 group annual accounts as reported to APRA would be subject to a limited assurance review by the Group Auditor. • Level 2 reporting would be carried out using prospective accounting. For Draft Prudential overseas subsidiaries, this would be done on a best endeavours basis. Standard GPS 311 • AIFRS may be used when reporting on overseas subsidiaries, provided Audit and Actuarial the liability valuations are established at a 75 per cent probability of Reporting and sufficiency. Valuation: Level 2 insurance group • An annual ILVR would be required but would not have to be subject to external peer review. • The ILVR would need to be submitted within four months of the end of year balance date. The group actuary would be required to report on matters including: − The sum of insurance liabilities for each insurer in the group; − Consolidation adjustments for intra-group transactions; − Consolidation adjustments for diversification benefits in risk margins (if any); and − Any other relevant adjustments. • In respect of overseas subsidiaries, the group actuary can use AIFRS accounting entries with relevant adjustments in order to observe APRA requirements. • The Group Actuary would need to comment on the adequacy of the calculation of the Level 2 insurance group’s Maximum Event Retention.

Draft Prudential • The requirements in this standard will apply in their current form to Level 2 Standard GPS 510 general insurance groups. Governance

Draft Prudential • The requirements in this standard will apply in their current form to Level 2 Standard GPS 520 Fit general insurance groups. and Proper

PricewaterhouseCoopers | 33 Conglomerates and non-operating holding companies – adis and general insurers APRA will issue transfer rules pursuant to subsection 36B(3) of the Financial Sector (Transfer of Business) Act 1998 (TOBA) established as a result of the Financial Sector Legislation Amendment (Restructures) Act 2007. The transfer rules are required to enable applications to the Minister from an ADI, general insurer or life insurance company for approval to use provisions in the TOBA to transfer assets and liabilities to a newly established authorised non-operating holding company (NOHC). With a move by some ADIs to restructure their groups under an authorised NOHC, APRA intends to undertake a review of the prudential arrangements applied to an authorised NOHC of an ADI and the group which it heads. This review will also be extended to authorised NOHCs incorporated in Australia which head groups including authorised general insurers. The review will consider, in particular, the measure of Level 3 (refer to “Prudential Standards for conglomerate supervision) capital applied to conglomerate groups of which an ADI or general insurer is a member. This will apply whether a group is headed by an ADI or general insurer or an authorised NOHC. APRA will establish a set of criteria and guidance to apply when determining whether to authorise a NOHC of an ADI. Existing criteria and guidance has already been established for general insurers. Discussion papers and draft prudential standards will be issued for comment in the second quarter of 2008.

Discretionary mutual funds A Discretionary Mutual Fund (DMF) is defined in the Discretionary Mutual Funds and Direct Offshore Foreign Insurers Act 2007 (DMF Act). In substance, DMFs are entities that offer ‘discretionary cover’, that is, an insurance-like product that may involve an obligation on the DMF to consider meeting a claim made on it, but gives the DMF a discretion as to whether it will pay the claim. A DMF may be a trust, mutual, company limited by guarantee or other structure. Following a Ministerial announcement on 3 May 2007, DMFs will not be regulated but will be required, to provide data to APRA. The Government will undertake a review of DMFs within three years of APRA commencing to collect data to determine whether they warrant prudential regulation. Amendments to the Financial Sector (Collection of Data) Act 2001 will be made to enable APRA to impose reporting standards on DMFs. APRA will consult on the specification and management of data to be collected from DMFs. The due date for first collection of data is scheduled to be October 2008.

Premium Recognition for Direct Insurers In its letter of 31 March 2006, APRA reinforced existing requirements for insurers to follow prospective accounting principles in completing APRA Returns.

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APRA requires that the recognition of premium revenue is to be from the date of risk acceptance by the insurer. Renewal invitations do not constitute acceptance of the risk, but are an invitation to treat. Acceptance occurs when the policyholder returns the renewal notice with the remittance and / or instructions to renew the policy which is / are accepted by the insurer. The premium is to be recognised from this date of acceptance. It should be noted that the date of acceptance of the risk can pre-date the inception date or commencement date of the renewal of the policy. This can also occur in respect of new business, such as the issue of a cover note or policy with a commencement date later than the issue date of the policy or cover note. Consistent with the premiums for accepted business being recognised from the acceptance date, the premiums liabilities for these polices are also to be recognised from the acceptance date. Further discussion on prospective accounting as it applies to level 2 General Insurance Groups is contained in APRA’s Response to Submissions paper on Prudential Supervision of General Insurance Groups dated 15 April 2008.

Life insurance APRA is continuing its harmonisation of regulated industries with changes to prudential standards for life insurers and friendly societies. All prudential standards now apply to both life insurers and friendly societies, with the exception of LPS 900 (life insurers only) and LPS 902 (friendly societies only). Transitional requirements, as outlined in LRS 901, are in place for regulatory reporting for the period 1 January 2008 to 31 March 2008. Changes made to the prudential framework include new standards and actuarial standards resulting from amendments to the Life Insurance Act 1995 made under the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act). The updated prudential standards, effective 1 January 2008, include sections removed from the Life Act by the SRR Act. Key changes are outlined below: The SRR Act transferred the responsibility for actuarial standards to APRA following the disbanding of the Life Insurance Actuarial Standard Board (LIASB). These actuarial standards have now been reissued as APRA prudential standards: • LPS 1.04 Valuation of Policy Liabilities (formerly AS 1.04); • LPS 2.04 Solvency Standard (formerly AS 2.04); • LPS 3.04 Capital Adequacy Standard (formerly AS 3.04); • LPS 4.02 Minimum Surrender Values and Paid-up Values (formerly AS 4.02); • LPS 5.02 Cost of Investment Performance Guarantees (formerly AS 5.02); • LPS 6.03 Management Capital Standard (formerly AS 6.03); • LPS 7.02 General Standard (formerly AS 7.02).

PricewaterhouseCoopers | 35 Three new prudential standards have been introduced: • LPS 230 Reinsurance – replacing the revoked PR 23 and PR 24 • LPS 310 Audit and Actuarial – incorporating key changes from the Life Act regarding the approval of auditors and actuaries; this is now aligned with LPS 520 • LPS 350 Contract Classification for the purpose of Regulatory Reporting – replacing the revoked PR49 Changes were made to two existing prudential standards to update for the revised Life Act: • LPS 510 Governance; • LPS 520 Fit and Proper.

A full list of current prudential standards is presented in table 2.3

Private health insurance During the year the industry has seen some significant developments amongst its players. NIB became Australia’s first publicly listed health insurer as a means of gaining access to capital. BUPA has also made an offer for MBF, which is to be voted upon by MBF members on 12 May 2008. The combined BUPA/MBF entity would rival Medibank Private for the mantle of being the largest private health insurer in the country. Following its win in the November federal election, the Labor government confirmed that it had no intention of privatising Medibank Private, after the previous government had announced its plans to sell the business. All existing private health insurers are required to have re-registered in line with the Private Health Insurance Act 2007 (the Private Health Act) so as to maintain their registration status after 1 July 2008. Private health insurance premiums increased by an average of 4.99% on 1 April 2008 (4.52% in April 2007, 5.68% in 2006). Annual rate increases continue to be subject to review and approval by Treasury and the Prime Minister. PHIAC has the power to mandate prudential standards as part of their supervisory capacity and may well exercise this power in the year ahead.

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2.2 Framework Under the regulatory framework that has been in place since 1 July 1998, the responsibilities for the payments system, prudential regulation and consumer protection are allocated as shown in Figure 2.1.

Figure 2.1 – Framework for payments, prudential regulation and consumer protection in Australia

Reserve Bank of Australia The Reserve Bank of Australia is Australia’s central bank and has responsibility for monetary policy, overall financial system stability and, through the Payments System Board, supervision of the payments system.

Australian Prudential Regulation Authority APRA is the single Commonwealth authority responsible for licensing and prudential regulation for all deposit-taking institutions, life and general insurance companies, superannuation funds and friendly societies. APRA is also empowered to appoint an administrator to provide investor or consumer protection in the event of financial difficulties experienced by life or general insurance companies. APRA’s powers to regulate and collect data from the insurance industry stem principally from the following acts: • Insurance Act 1973 (the Insurance Act) for general insurance; • Life Insurance Act 1995 (the Life Act) for life insurance;

PricewaterhouseCoopers | 37 • Financial Sector (Collection of Data) Act 2001; • Financial Sector (Shareholdings) Act 1998; • Insurance (Acquisitions and Takeovers) Act 1991; and • Financial Sector (Transfers of Business) Act 1999 for life insurance. While licences to write most classes of insurance business are provided by APRA, state and territory governments issue licences to write certain compulsory classes of business, such as: • Workers compensation; and • Compulsory third party (CTP). • The status of these lines of business is shown below by state or territory.

Table 2.1 – State and territory regulation of workers compensation and CTP insurance

State/Territory Workers’ compensation CTP ACT Privatised Monopoly private sector insurer (IAL) NSW Private administration; risk borne by State Privatised NT Privatised Territory monopoly QLD State monopoly Privatised SA State monopoly with claims managed by licensed State monopoly with claims private sector insurers managed by private sector insurer TAS Privatised State monopoly VIC Private administration; risk borne by State State monopoly WA Privatised State monopoly

As supervisor of general and life insurance companies, APRA administers: • The Insurance Act – APRA’s stated objectives in respect of general insurance are “to protect the interest of insurance policyholders, in particular, through the development of a well managed, competitive and financially sound general insurance industry”; and • The Life Act – The objective of the Life Act is to “protect policy owners and promote financial systems by encouraging a viable and competitive Australian life insurance industry with financially sound participants and fair trading practices”. Accordingly, APRA represents the interests of both current and future life insurance policyholders. APRA supervises 32 life offices and just under 100 active general insurers. Although APRA is responsible for the prudential regulation of insurers, it is not responsible for product disclosure standards, customer complaints or licensing of financial service providers (including authorised representatives and insurance brokers) as these responsibilities fall to Australian Securities and Investment Commission (ASIC) under its Australian Financial Services Licence (AFSL) regime. APRA co-operates with other regulators where responsibilities overlap. In particular, APRA works closely with ASIC and the Reserve Bank of Australia. It also liaises,

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when necessary, with the Federal Department of Treasury, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities Exchange (ASX). Since its establishment in 1998, APRA has been working to harmonise the regulatory framework of regulated institutions. The aim is to apply similar principles across all prudential regulation and to ensure that similar financial risks are treated in a consistent manner whenever possible. APRA supervises life insurance companies authorised under the Life Act with a view to maximising the likelihood that these companies will be able to meet their obligations to policyholders. Prudential requirements for life insurance companies are set out in prudential standards and in prudential rules.

Probability and Impact Rating System APRA’s primary objective is to minimise the probability of regulated institutions failing and to ensure a stable, efficient and competitive financial system. APRA uses its Probability and Impact Rating System (PAIRS) to classify regulated financial institutions in two key areas: The probability that the institution may be unable to honour its financial promises to beneficiaries – depositors, policyholders and superannuation fund members; and The impact on the Australian financial system should the institution fail. As part of its role as a prudential regulator, APRA uses PAIRS to assess risk and to: • determine where to focus supervisory effort; • determine the appropriate supervisory actions to take with each regulated entity; • define each supervisor’s obligation to report on regulated entities to APRA’s executive committee, board and, in some circumstances, to the relevant government minister; • provide a risk diagnostic tool; and • ensure regulated entities are aware of how APRA determines the nature and intensity of their supervisory relationships. The PAIRS Supervisory Attention Index rises as the probability of failure and the potential impact of failure increase, ranging from “Low” to “Extreme”. These ratings are not publicly available, and are used only to identify potential issues and seek remediation before serious problems develop.

PricewaterhouseCoopers | 39 Australian Securities and Investments Commission ASIC is the single Commonwealth regulator responsible for market integrity and consumer protection functions across the financial system. It is responsible for: • Corporate regulation, securities and futures markets; • Market integrity and consumer protection in connection with life and general insurance and superannuation products, including the licensing of financial service providers; and • Consumer protection functions for the finance sector. Further details on ASIC’s role in consumer protection and the licensing of financial services providers can be found in Chapter 4. Most insurers require an AFSL, and as such, a dual licensing system exists with overlapping requirements under both ASIC and APRA.

Private Health Insurance Administration Council The Private Health Insurance Administration Council (PHIAC) operates by force of section 264-1 of the Private Health Insurance Act 2007 (the Private Health Act). As at 15 April 2008 PHIAC was supervising 38 health funds, which provide private health insurance coverage for 44 per cent of the Australian population. Section 264-5 of the Private Health Act sets out PHIAC’s broad objectives which are to: • foster an efficient and competitive health insurance industry; • protect the interests of consumers; and • ensure the prudential safety of individual private health insurers. APRA and PHIAC have signed a memorandum of understanding (MOU) setting out a framework for co-operation in areas of common interest. The MOU recognises the importance of close co-ordination and co-operation between the two organisations. In particular, it provides for exchange of relevant information and liaison on issues of joint interest.

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2.3 Authorisation

General insurance In September 2001, the Federal Parliament enacted amendments to the Insurance Act (known as the General Insurance Reform Act 2001) designed to create a three-tier regulatory system for general insurers: • Tier 1 – The Insurance Act contains the high-level principles necessary for prudential regulation; • Tier 2 – Prudential standards detail compliance requirements for companies authorised under the Insurance Act; and • Tier 3 – Guidance notes accompany each prudential standard, providing details of how APRA expects them to be interpreted in practice. Stage 2 amended this approach to make Tier 2 more high-level, principles-based requirements and to replace Tier 3 with a set of prudential practice guides that provide non-binding guidance on prudential good practice and on how best to meet the requirements of the new standards. The passing of Financial Section Legistlation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007 in September 2007 means that DOFIs must be authorised by APRA to operate in Australia, with effect from 1 July 2008. There will be a limited transition period, whereby DOFIs which lodge an application prior to 31 May 2008 will be permitted to continue operating whilst their application is considered. This means that DOFIs which are not authorised by APRA will not be able to write any business in Australia, subject to certain exemptions. These exemptions are intended to cover circumstances where insurance risks cannot be appropriately placed with an Australian authorised insurer; examples include: • Large companies with complex risks which may not be able to be covered solely through authorised insurers; • Specific lines of cover may not be available from authorised insurers, eg. nuclear, terrorism, biological risk, aviation liability

Applications for licensing No private sector general insurance company may conduct insurance business in Australia unless authorised under the Insurance Act. Under Section 12 of the Insurance Act, APRA can authorise a body corporate which has applied in writing to carry on an insurance business. APRA can impose and vary licence conditions of an insurer under Section 13 and exempt an insurer from complying with all or part of the Insurance Act under Section 7. There is a guidance note on the authorisation of general insurers. In addition to requiring compliance with prudential standards, the note outlines supporting information expected to accompany an application, although APRA can request additional information as it sees fit. The information expected to be provided includes:Details of the ownership structure, board and management (including resumes and the company’s constitution);

PricewaterhouseCoopers | 41 • Applications for the proposed approved auditor and actuary; • A three-year business plan with financial and capital adequacy projections, including sensitivity analysis; • Systems and controls documentation (risk management strategy, reinsurance management strategy, business continuity plan and details of accounting and reporting systems); • Details of subsidiaries and associates and any proposed relationships; • An auditor’s certificate verifying the level of capital and capital ratios of the applicant; • An actuary’s report in accordance with GPS 310; • Written undertakings to comply with prudential standards at all times, consult and be guided by APRA on prudential matters and new business initiatives and provide relevant information required for the prudential supervision of the applicant; and • For foreign-owned insurers, approval of foreign parent’s home supervisor and details of the foreign parent’s operations and an acknowledgement that APRA may discuss the conduct of the applicant with its head office and home supervisor. In order to underwrite workers compensation or CTP insurance, additional approval from state and territory government regulators is required under the relevant state or territory legislation. This guidance note has not yet been updated to reflect the changes in the prudential standards arising from Stage 2. Non-operating holding companies (NOHCs) are authorised in a similar manner as regulated general insurers under Sections 18–23.

Australian Financial Services Licence ASIC requires all general insurers who sell insurance products to retail clients to hold an AFSL. The licensing requirements are discussed under “authorised representatives and insurance brokers” later in this chapter and the impacts on the sale and distribution of insurance products are discussed in Chapter 3.

Ownership restrictions The Financial Sector (Shareholdings) Act limits shareholdings to 15 per cent of an insurer, unless otherwise approved by the Federal Treasurer. The Insurance (Acquisitions and Takeovers) Act complements this legislation by requiring government approval for offers to buy more than 15 per cent of an insurer.

Restructure of operations The Insurance Act provides for the restructuring of insurance operations. Sections 17A to 17I of the Act allow for the assignment of insurance liabilities between insurers subject to the satisfaction of several steps, including: • Approval of APRA; • Informing affected policyholders; and • Obtaining confirmation of the assignment from the Federal Court of Australia. GPS 410

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Transfer and Amalgamation of Insurance Business for General Insurers provides more detailed information on the requirements for transferring insurance portfolios between registered insurers. In the event of revocation of an insurer’s authorisation, APRA can stipulate the assignment of liabilities immediately prior to the revocation. It should be noted that APRA can revoke a licence only with the Federal Treasurer’s approval, unless it is a request from an insurer with no remaining Australian insurance liabilities. Under Section 29 of the Insurance Act, insurers must publish name changes in the daily press. Section 116 addresses the issue of winding up an insurer and stipulates that assets in Australia can be applied only to settle liabilities in Australia (unless these are nil). For the purpose of this and the Section 28 solvency requirement, a reinsurance receivable from an overseas party is considered to be an asset in Australia if: • the reinsurance contract relates to Australian liabilities; and • reinsurance payments are made in Australia. A liability is in Australia if the risk is in Australia or if the insurer has undertaken to satisfy the liability in Australia.

Life insurance All companies writing life insurance business, including friendly societies that are life insurers, must be registered under the Life Act, as outlined in Part 3 (sections 17–22). The Life Act refers the application process, and subsequent decision to APRA. Information previously disclosed in the Life Insurance Regulations 1995 Section 3.01, regarding the application process, has been deleted. APRA is currently updating its guidance on applications due to recent changes in the Life Act.

Australian Financial Services Licence ASIC requires all life insurers who sell insurance products to retail clients to hold an AFSL. The requirements for licensing are discussed under “authorised representatives and insurance brokers” later in this chapter, and the impacts on the sale and distribution of insurance products are discussed in Chapter 3.

Health insurance An organisation may not carry on a health insurance business unless it is registered under Part 4-3 of the Private Health Act.

PricewaterhouseCoopers | 43 All existing private health insurers are required to have re-registered in line with the Act so as to maintain their registration status after 1 July 2008. PHIAC has the power, on application to register as private health insurers bodies that are incorporated bodies for the purposes of the Corporations Act 2001. PHIAC will take into account the ability of the applicant to comply with the obligations imposed by the Act. Registration is granted by the Council subject to terms and conditions as the Council sees fit. Health funds must gain approval from the Prime Minister, Federal Treasurer and the Minister for Health and Ageing for any rule changes, including rate changes. Health insurance organisations may be incorporated under a variety of different statutes, including companies and friendly societies incorporated under the Corporations Act 2001 and life insurance companies registered under the Life Act. There are also various special federal, state and territory-based organisations incorporated under their own Acts relating to incorporated not-for-profit entities, such as co-operatives and associations.

Authorised representatives and insurance brokers The Corporations Act requires brokers to either hold an AFSL or become an authorised representative of a separate licensee. Except under limited circumstances, no person or company may carry on an insurance broking business or act as an agent of a foreign insurer unless they hold an AFSL under the Corporations Act or become a representative of a separate licensee.

Australian Financial Services Licence The Corporations Act requires all sellers of insurance products to retail clients, including registered insurers and brokers, to obtain an AFSL. To obtain a licence, the applicant must meet the obligations under Section 912A and demonstrate that they will provide financial services efficiently, honestly and fairly. Specific provisions under the Corporations Regulations require that financial services licensees have in place the following: • Documented procedures to monitor, supervise and train representatives; • “Responsible officers” (senior management responsible for day-to-day business decisions) with minimum standards of knowledge and skills in financial services; • Adequate resources (financial, technological and human) to provide services covered by the licence. These requirements do not apply to APRA-regulated entities (such as registered insurers), but do apply to any non-APRA-regulated subsidiaries; • Adequate risk management systems (AS4360, the Australian Standard for Risk Management, acts as a guide to minimum requirements). These requirements do not apply to APRA-regulated entities, but do apply to any non-APRA-regulated subsidiaries; • Adequate compliance framework (AS3806, the Australian Standard on Compliance Programs, acts as a guide to minimum requirements);

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• Internal and external dispute resolution procedures (where dealing with retail clients); • Adequate compensation requirements (where dealing with retail clients as described in Section 912B). This typically is achieved through membership of a guarantee fund or obtaining professional indemnity insurance cover; and • Register of representatives, i.e. directors and employees of the insurer and its related bodies corporate, as well as authorised representatives and insurance brokers. Once ASIC has granted an AFSL pursuant to Section 913B of the Corporations Act, any variations to authorisations and conditions of the licence can be made electronically via the ASIC website. Financial and reporting obligations under the AFSL may vary depending on the licensee’s circumstances and whether additional requirements are imposed by ASIC. Note: This is not intended to be legal advice and it should not be relied upon as such. Readers should obtain their own appropriate advice in relation to their specific circumstances, their obligations to obtain an AFSL and the specific obligations that may apply to them under their AFSL and applicable policy.

Renewal of registration Holders of an AFSL are subject to ongoing financial requirements which are described in ASIC PS 166. These requirements include: • Positive net assets and solvency – All AFSL holders must be solvent at all times and have a continuous obligation to monitor their solvency. • Rolling three-month cash projections – There are two methods available for performing the projections: − Option 1 – Reasonable estimate projection plus cash contingency requires licensees to have access to cash to meet any shortfalls in the projected period; or − Option 2 – Contingency-based projection requires licensees to demonstrate that sufficient cash is available to meet commercial contingencies that could impact cash flow. ASIC has provided additional options for subsidiary entities in consolidated groups to meet their cash needs projections by using the cash flows of their parent entity. This alternative can only be adopted where the subsidiary is able to demonstrate that it has an enforceable commitment from its parent entity to meet its liabilities or reasonably expects that it can draw upon the cash resources of other members of the consolidated group to meet its obligations. Licensees should refer to ASIC Information Release IR 03-44 for further information on this option. • Risk to financial resources – All AFSL holders must have systems to manage risk which includes risk to financial resources. The risk management framework required will depend on the nature, scale and complexity of the business. Licence holders are required to meet ongoing notification obligations, which include requirements to notify ASIC about:

PricewaterhouseCoopers | 45 • Breaches and events; • Changes in particulars (form F205 for change of name of corporate entities, form FS20 for all others); • Authorised representatives (forms FS30, FS31, FS32); • Financial statements and audit (forms FS70 and FS71); and • Appointment/removal of auditor (forms FS06, FS07, FS08 and FS09). Section 989B of the Corporations Act also outlines ongoing financial reporting and audit obligations. A licensee is required to prepare and lodge an audited profit and loss statement and a balance sheet within three months of the end of its financial year. ASIC Class Order 05/637 extended the lodgement deadline for an entity’s first AIFRS annual financial report, half-year financial report and AFSL audit opinions by one month. However, this relief is not applicable to listed disclosing entities. ASIC has released Class Order 06/68 which grants relief to local branches of foreign licensees from preparing and lodging accounts in accordance with Section 989B of the Corporations Act. This relief is only available where the foreign licensee lodges accounts, prepared and audited in accordance with the requirements of its local financial reporting jurisdiction with ASIC once every calendar year.

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2.4 Supervision and compliance

General insurance APRA supervisory objectives are met in two main ways: • The submission of financial and other returns so that APRA can monitor the financial position of the general insurer and its ability to meet policyholder claims as they fall due; and • The submission of signed statements and declarations from the general insurer, the approved auditor and the approved actuary that provide APRA with assurance that systems and procedures to meet regulatory requirements are in place, are adequate and have been independently tested. The financial and other returns are described later in this chapter. The other regulatory requirements and the main features of the prudential standards are described below.

Table 2.2 – Summary of current prudential standards

Effective currently Details

GPS 110 Capital Adequacy See Section 2.5

GPS 120 Assets In Australia See Section 2.5

GPS 220 Risk Management See “Risk management” in this section

GPS 222 Business Continuity Management See “Business continuity management” in GGN 222.1 Risk Assessment and Business this section Continuity Management

GPS 230 Reinsurance Management See Section 2.7

GPS 231 Outsourcing See Section 2.5

GPS 310 Audit and Actuarial Reporting See “Approved auditor and approved and Valuation actuary” in this section and in Chapter 4

GPS 410 Transfer and Amalgamation of Insurance See Section 2.3 Business for General Insurers

GPS 510 Governance See “Governance” in this section

GPS 520 Fit and Proper See “Fit and proper” in this section

Source: Australian Prudential Regulation Authority. Risk management GPS 220 aims to ensure that a general insurer has systems for identifying, assessing, mitigating and monitoring the risks that may affect its ability to meet its obligations to policyholders. These systems – together with the structures, processes, policies and roles supporting them – are referred to as a general insurer’s risk management framework.

PricewaterhouseCoopers | 47 The prudential standard requires that a general insurer: • includes a documented Risk Management Strategy (RMS) in its risk management framework; • has sound risk management policies and procedures and clearly defined managerial responsibilities and controls; • submits its RMS to APRA on an annual basis and re-submit when any material changes are made; • has a dedicated risk management function (or role) responsible for assisting in the development and maintenance of the risk management framework; • submits a three-year rolling Business Plan to APRA and re-submits after each annual review or when any material changes are made; • submits a Risk Management Declaration (RMD) to APRA on an annual basis; and • submits a Financial Information Declaration (FID) to APRA on an annual basis (see Chapter 5).

Risk management framework The risk management framework should consider, at a minimum, the following risks: • Balance sheet and market risk; • Credit risk; • Operational risk; • Insurance risk; • Reinsurance risk; • Concentration risk; and • Risks arising from the business plan. The framework should also cover other elements such as the interaction between the risk management role and the board; the processes used to identify, monitor and mitigate risks; and the mechanisms for monitoring the minimum capital requirements (MCR). To assist general insurers in developing their own risk management framework, APRA has released the following non-binding prudential practice guides: • GPG 200 Risk Management; • GPG 220 Credit Risk; • GPG 230 Operational Risk; • PPG 231 Outsourcing; • GPG 232 Custody Arrangements; • PPG 233 Pandemic Planning and Risk Management; • GPG 240 Insurance Risk; and

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• GPG 245 Reinsurance Management Strateqy • GPG 250 Balance Sheet and Market Risk • GPG 510 Governance; and • GPG 520 Fit and Proper. The general insurer is also required to have this risk management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurer’s operations and the extent of any change in the business mix or risk profile. The review must cover the RMS, the risk management role and the system of internal control.

Risk management declaration The board of a general insurer is required to submit a RMD to APRA stating that: • it has systems in place for the purpose of ensuring compliance with the Insurance Act, the regulations, prudential standards, the Financial Sector (Collection of Data) Act, reporting standards, authorisation conditions, directions and any other requirements imposed by APRA, in writing; • the board and senior management are satisfied with the efficacy of the processes and systems surrounding the production of financial information at the insurer; • there is an RMS in place that sets out its approach to risk management and was developed in accordance with the requirements of GPS 220; • there is a Reinsurance Management Strategy (REMS) in place for selecting and monitoring reinsurance programs and developed in accordance with GPS 230; • over the last financial year, the insurer has substantially complied with its RMS and REMS obligations and that these strategies are operating effectively in practice, having regard to the risks they are designed to control; and • copies of the insurer’s current RMS and REMS have been lodged with APRA. This declaration is to be signed by two directors (or the senior officer if a branch) and is due within four months of the financial year-end. If this declaration contains any qualifications, the deviation from the risk management framework should be disclosed, as well as any mitigating factors or steps taken to rectify.

Business continuity management The prudential standard and associated guidance note on business continuity management (BCM). GPS 222 Business Continuity Management and GGN 222.1 Risk Assessment and Business Continuity Management aims to ensure that general insurers have a holistic approach to BCM rather than focusing just on data recovery. The standard dictates that this “whole of business” approach and the BCM itself should be commensurate with the nature and scale of the entity.

PricewaterhouseCoopers | 49 Key requirements of the prudential standards include: • The board of directors and senior management of a general insurer must consider business continuity risks and controls as part of the company’s overall risk management framework, which must be provided to APRA annually; • A general insurer must identify critical business functions, resources and infrastructure which, if disrupted, would have a material impact on the company’s business operations, reputation or profitability; • A general insurer must assess the impact of plausible disruption scenarios on critical business functions, resources and infrastructure and have in place appropriate recovery strategies to ensure all necessary resources are readily available to withstand the impact of the disruption; and • A general insurer must develop, implement and maintain through review and testing procedures, a Business Continuity Plan that documents procedures and information which enable the company to respond to disruptions and recover critical business functions.

Approved auditor and approved actuary The key requirements of GPS 310 in relation to audit and actuarial reporting and valuation are: • An insurer must make arrangements to enable its approved auditor and approved actuary to undertake their roles and responsibilities; • The approved auditor must audit, and provide an opinion to the board on, the yearly APRA statutory accounts of the general insurer (see Chapter 4); • The approved auditor must review other aspects of the general insurer’s operations on an annual basis and prepare a report on these matters to the board (see “Approved auditor’s compliance opinion” below); • An approved auditor may also be required to undertake other functions, such as a special purpose review (see “APRA targeted reviews” below); • The approved actuary must prepare a Financial Condition Report (FCR) and an Insurance Liability Valuation Report (ILVR) and provide these reports to the board (see Chapter 4); • The approved actuary must apply GPS 310 when valuing the general insurance liabilities for the purposes of GPS 110 Capital Adequacy for General Insurers and reporting requirements under the Financial Sector (Collection of Data) Act (see below and Chapter 4); • A general insurer must arrange to have the ILVR of its approved actuary peer- reviewed by another actuary (see Chapter 4); and • A general insurer must submit all certificates and reports required to be prepared by its approved auditor and approved actuary to APRA. Many of the requirements detailed above are covered in Chapter 4. Other regulatory compliance issues are discussed below.

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Approved auditor’s compliance opinion The approved auditor must prepare a report on an annual basis to the board of a general insurer that provides an opinion on a range of regulatory matters. This report must be based on at least a limited assurance engagement and is to be prepared in accordance with professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB). The report must specify the results of the approved auditor’s investigations in respect of whether: • there exist systems, procedures and controls, that are kept up to date, which address compliance with all prudential requirements; • systems, procedures and controls relating to the integrity of actuarial data and source data used in the annual and quarterly APRA returns are adequate and effective; and • the general insurer has complied, in all significant respects, with its RMS and REMS obligations. The report must include details of any qualification against the above, as well as reporting by exception any identified non-compliance with prudential requirements or any matters that will, or are likely to, adversely affect the interests of policyholders of the general insurer. The report must be provided to the general insurer in sufficient time for it to be submitted to APRA on the day that their yearly statutory accounts are due.

Governance GPS 510 Governance sets out what APRA consider to be the minimum requirements which must be met to achieve good governance. A sound governance framework is important in helping maintain public confidence in regulated entities. The actual governance arrangements in place will vary from entity to entity depending on the size, complexity and risk profile of each entity. However they key requirements stipulated in GPS 510 are: • specific requirements with respect to Board size and composition; • the chairperson of the Board must be an independent director; • a Board Audit Committee must be established; • regulated institutions must have a dedicated internal audit function; • certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; and • the Board must have a policy on Board renewal and procedures for assessing Board performance. A number of these requirements also apply to foreign general insurers.

PricewaterhouseCoopers | 51 Figure 2. 2 – Capital base calculation based on GPS 110 Capital Adequacy

Do not require APRA Upper Tier 2 Capital only TIER 1 CAPITAL approval. All other eligible to maximum of 100% of Tier 1 Capital Upper Tier 1 Capital capital instruments require approval. (after deductions). n Paid up ordinary shares; n General reserves; TIER 2 CAPITAL n Retained earnings; Upper Tier 2 Capital n Current year after tax earnings less expected n Cumulative dividends; irredeemable preference shares; n Technical provisions in excess of those required n Mandatory convertible by GPS 310; notes and similar instruments; n Non-cumulative irredeemable + n Perpetual preference shares; and subordinated debt; and CAPITAL n Any other hybrid n Other “innovative” capital instruments (issued by the (debt/equity) capital BASE insurer or through special instruments of a permanent nature. = purpose vehicles). Lower Tier 2 Capital Plus: cannot exceed 50% of Lower Tier 2 Capital Term of initial eligible Tier 1 Capital. n Term subordinated debt; instrument must

n Limited life redeemable be greater than preference shares; and five years. Amount eligible for inclusion n Any other similar limited life capital instruments. as capital is amortised over the last five years. (e.g. a loan maturing in less than one year has only 20% included as Tier 2 Capital). Insurance risk capital factors Table 2.3 – Direct insurance

Class of Business Outstanding Claims Premiums Liability Risk Capital Factor Risk Capital Factor

Householders 9% 13.5% Commercial Motor Domestic Motor Travel

Fire and ISR 11% 16.5% Marine and Aviation Consumer Credit Mortgage Other Accident Other

CTP 15% 22.5% Public and Product Liability Professional Indemnity Employers’ Liability

Table 2.4 – Inwards reinsurance

Class of Business Outstanding Claims Premiums Liability Risk Capital Factor Risk Capital Factor Property – Facultative Proportional 9% 13.5% – Treaty Proportional 10% 15% – Facultative Excess of Loss 11% 16.5% – Treaty Excess of Loss 12% 18% Marine & Aviation – Facultative Proportional 11% 16.5% – Treaty Proportional 12% 18% – Facultative Excess of Loss 13% 19.5% – Treaty Excess of Loss 14% 21% Casualty – Facultative Proportional 15% 22.5% – Treaty Proportional 16% 24% – Facultative Excess of Loss 17% 25.5% – Treaty Excess of Loss 18% 27%

Source: APRA Guidance Note GGN 110.3 Table 2.5 – Investment Capital Factors

Class of Business Investment Capital Factor

Cash Debt Obligations of: 0.5% • the Australian Government; • an Australian State or Territory government; or • the national government of a foreign country where: – the security has a Grade 1 counterparty rating; or, – if not rated, the long-term, foreign currency counterparty rating of that country is Grade 1. GST receivables (input tax credits) Any debt obligation that matures or is redeemable in less than one year with a 1% rating of Grade 1 or 2 Cash management trusts with a rating of Grade 1 or 2 Any other debt obligation (that matures or is redeemable in one year or more) 2% with a rating of Grade 1 or 2 Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 1 or 2 (subject to any determination by APRA under paragraph 5A of GGN 110.4) Unpaid premiums due less than six months previously 4% Unclosed business Any other debt obligation with a rating of Grade 3 Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 3 (subject to any determination by APRA under paragraph 5A of GGN 110.4) Any other debt obligations with a counterparty rating of Grade 4 6% Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 4 (subject to any determination by APRA under paragraph 5A of GGN 110.4) Any other debt obligations with a counterparty rating of Grade 5 8% Reinsurance recoveries, deferred reinsurance expenses and other reinsurance assets due from reinsurers with a counterparty rating of Grade 5 a counterparty rating of Grade 5 Unpaid premiums due more than six months previously Listed equity instruments (including subordinated debt) 8% (prior to 1 July 2008) Units in listed trusts 16% (after 30 June 2008) Direct holdings of real estate 20% Unlisted equity instruments (including subordinated debt) Units in unlisted trusts (excluding cash management trusts listed above) Other assets not specified elsewhere in this table Loans to directors of the insurer or directors of related entities (or a director’s 100% spouse) Unsecured loans to employees exceeding $1,000 Assets under a fixed or floating charge Goodwill (including any intangible components of investments in subsidiaries) 0% Other intangible assets Future income tax benefits (Assets in this category are zero weighted because they are deducted from Tier 1 Capital when calculating an insurer’s capital base)

Source: APRA Guidance Note GGN110.4 Regulation and supervision | 2

Table 2.6 – Counterparty grades

Grade Standard Moody’s AM best Fitch & Poor’s

1 AAA Aaa A++ AAA

2 AA+ Aa1 A+ AA+

3 A+ A1 A A+ A A2 A- A A- A3 A-

4 BBB+ Baa1 B++ BBB+ BBB Baa2 BBB BBB- Baa3 BBB-

5 BB+ or below Ba1 or below B+ or below BB+ or below

Notes: Unrated assets or exposures should be classified as Grade 4. Insurers should, in general, use the same rating agency for determining counterparty gradings. Where the insurer has counterparties with multiple ratings from two or more of the rating agencies in the table above, the insurer should consistently choose the ratings of a single agency whenever possible. For example, an insurer may have a number of counterparties that are rated by Standard & Poor’s and AM Best. In this case, the insurer should choose a single agency that will be consistently used whenever the individual ratings conflict. APRA’s approval must be sought if an insurer wishes to use the rating determined by a rating agency not included in the table above. Fit and proper GPS 520 applies to all general insurers and authorised non-operating holding companies. The key requirements of this standard are that: • An institution must have and implement a written fit and proper policy that meets the requirements of the standard; • The fitness and propriety of a responsible person must generally be assessed prior to initial appointment and then re-assessed annually (or as close to annually as practicable); and • An institution must take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper. The standard stipulates who are regarded as responsible people at different types of institutions and sets out additional restrictions on the approved actuary and approved auditor roles. However, it leaves the determination of what is an appropriate fit and proper policy in the hands of the general insurer.

APRA targeted reviews Both the Insurance Act and the prudential standards stipulate that the approved auditor (or approved actuary) may be required to undertake other functions specified by APRA in consultation with the general insurer. In 2003, APRA began a process of “targeted reviews” of general insurers, similar to the process it had implemented with the authorised deposit-taking institutions. These reviews highlight a particular area that APRA is interested in and require the general insurer to engage the approved auditor to prepare a report in respect of that selected area of operation. Apart from highlighting areas where further improvement could be sought, these reviews provide APRA with an industry snapshot that helps to identify and promote best practices. In 2006, the subject of APRA’s Targeted Reviews on general insurers was reinsurance documentation. This includes reviewing the reinsurance management framework to ensure there was a process to have legally binding contracts in place and compliance with the 2 month and 6 month rules in GPS 230. There was no Targeted Review in 2007. The subject of the 2008 review is yet to be determined.

Prudential supervision of lenders mortgage insurance In January 2006, APRA released Attachment F to GPS 110 and GRS 170.1. These took effect on 1 January 2006. These new standards were introduced following the publication of two discussion papers in August 2004 and February 2005. The need for this reform was identified after a housing loan stress test was conducted by APRA on lenders mortgage insurers (LMIs) in late 2003. The stress test identified some inadequacies in the current capital framework and that there was an increasing number of LMIs taking advantage of the lower capital requirements than that applicable to authorised deposit-taking institutions (ADIs).

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APRA require LMIs to operate as mono-line insurers and has additional prudential requirements for LMI insurers: • A prescriptive maximum event retention (MER) model; • Changes to the MER reporting requirement; and • Measures to clarify the proposed definition of LMIs for qualifying capital concessions to ADIs.

Life insurance APRA supervisory objectives are met in two main ways: • The submission of financial and other returns so that APRA can monitor the financial position of the life insurer and its ability to meet policyholder claims as they fall due; and • Compliance with new prudential standards, which have been introduced on a progressive timescale. In addition to the reporting obligations discussed in Chapter 4, Parts 7 and 8, the Life Act grants powers to APRA to monitor and investigate life insurance companies, including the power to appoint a judicial manager. A judicial manager acts in a similar manner to the administrator of a financially troubled company and, in accordance with Section 175 of the Life Act is appointed by a judge to whom he must report the recommended course of action for the insurer. The main features of the prudential standards are discussed below:

Table 2.3 – Summary of current prudential standards Effective currently Commencement Details Date PS 3 Prudential Capital Requirement June 2002

LPS 1.04 Valuation of Policy January 2008 See “LPS 1.04 to 7.02 Formerly Actuarial Liabilities Standards” in this section

LPS 2.04 Solvency Standard January 2008 See Section 2.5

LPS 3.04 Capital Adequacy Standard January 2008 See Section 2.5

LPS 4.02 Minimum Surrender Values January 2008 See “LPS 1.04 to 7.02 Formerly Actuarial and Paid-up Values Standards” in this section

LPS 5.02 Cost of Investment January 2008 See “LPS 1.04 to 7.02 Formerly Actuarial Performance Standards” in this section

LPS 6.03 Management Capital January 2008 See Section 2.5 Standard

LPS 7.02 General Standard January 2008 See “LPS 1.04 to 7.02 Formerly Actuarial Standards” in this section

LPS 220 Risk Management March 2007 See “LPS 220 Risk management” in this section

PricewaterhouseCoopers | 57 Effective currently Commencement Details Date LPS 230 Reinsurance January 2008 See Section 2.7

LPS 231 Outsourcing October 2006 See “LPS 231 Outsourcing” in this section

LPS 232 Business Continuity March 2007 See “LPS 232 – Business Continuity Management Management” in this section

LPS 310 Audit and Actuarial January 2008 See “LPS 310 – Audit and Actuarial Requirements Requirement” in this section

LPS 350 Contract Classification for December 2007 See “LPS 350 – Contract Classification for the Purpose of Regulatory Reporting the Purpose of Regulatory Reporting” in this section

LPS 510 Governance January 2008 See “LPS 510 – Governance” in this section

LPS 520 Fit and Proper January 2008 See “LPS 520 – Fit and Proper” in this section

LPS 900 Consolidation of Prudential January 2008 See “LPS 900 – Consolidation of Prudential Rules No. 15, 18, 22, 27 and 28 Rules No. 15, 18, 22, 27 and 28” in this section

LPS 902 Approved Benefit Fund January 2008 See “LPS 902 Approved Benefit Fund Requirements Requirements” in this section

Source: Australian Prudential Regulation Authority LPS 1.04 to 7.02 – Formerly Actuarial Standards Effective from 1st January 2008, the SRR Act transferred the responsibility for setting actuarial standards from the Life Insurance Actuarial Standard Board (LIASB) to APRA. As a result, the actuarial standards 1.04, 2.04, 3.04, 4.02, 5.02, 6.03 and 7.02 were reissued as APRA prudential standards (with the same numbers) as set out in the table above.

LPS 220 – Risk Management The underlying principles of LPS 220 include requiring a life company: • to maintain a risk management framework that identifies, assesses, monitors, reports on and mitigates all material risks faced by the company • to have a written 3 year business plan approved by the board • to maintain a risk management strategy which outlines the company’s risk appetite and its strategy for managing risk • to have its risk management framework subject to review by persons independent to the operation of the company • to supply APRA with an annual declaration on risk management approved by the board.

LPS 231 – Outsourcing The key requirements of the prudential standard include requiring a life company: • to have a policy relating to outsourcing of material business activity;

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• to have sufficient monitoring processes in place to manage the outsourcing of material business activities; • to have a legally binding agreement in place for all material business activities with third parties, unless otherwise agreed by APRA; • to consult with APRA prior to entering into agreements to outsource material business activities to service providers who conduct their activities outside Australia; and • to notify APRA after entering into agreements to outsource material business activities.

LPS 232 – Business Continuity Management The key elements of the prudential standard are to: • develop and maintain a Business Continuity Management Policy • conduct a Business Impact Analysis • maintain a Business Continuity Plan and test at least annually • notify APRA of a major disruption

LPS 310 – Audit and Actuarial Requirements The key requirements of the prudential standard include requiring: • the records of each life company in relation to each financial year to be audited by an auditor appointed by the life company; • each life company to arrange for its appointed actuary to conduct financial condition investigations and provide actuarial advice regarding life policies.

LPS 350 – Contract Classification for the Purpose of Regulatory Reporting The purposes of the prudential standard are: • to distinguish between those contracts that meet the definition of a life insurance contract under Australian Accounting Standard AASB 1038 Life Insurance Contracts and those that do not; • to identify key components of contracts written by life companies (insurance component, financial instrument, service component, discretionary participation feature and embedded derivatives); and • to stipulate the circumstances in which such components must be unbundled for regulatory reporting purposes and for the valuation of contracts in accordance with Prudential Standard LPS 1.04 – Valuation of Policy Liabilities.

PricewaterhouseCoopers | 59 LPS 510 – Governance The key requirements of the prudential standard include: • specific requirements with respect to Board size and composition; • the chairperson of the Board must be an independent director; • a Board Audit Committee must be established; • life companies must have a dedicated internal audit function; • certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; and • the Board must have a policy on Board renewal and procedures for assessing Board performance.

LPS 520 – Fit and Proper The key requirements of the prudential standard are: • a life company must have and implement a written fit and proper policy that meets the requirements of the standard; • the fitness and propriety of a responsible person must generally be assessed prior to initial appointment and then re-assessment annually (or as close to annually as practicable); • a life company must take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper; • additional requirements must be met for certain auditors and actuaries; and • information must be provided to APRA regarding responsible persons and the life company’s assessment of their fitness and propriety.

LPS 900 – Consolidation of Prudential Rules No. 15, 18, 22, 27 and 28 The prudential standard consolidates the following Prudential Rules: • Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2)&(3)); • Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4)); • Prudential Rules No. 22 Non-Participating Benefit (s 15(3); • Prudential Rules No. 27 Starting Amount (s 61(1)); and • Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)).

LPS 902 – Approved Benefit Fund Requirements The prudential standard sets out the requirements for: • the content of approved benefit fund rules;

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• the allocation of an approved benefit fund surplus (depending on the classification of the approved benefit fund); and • the provision of seed capital.

Health insurance In addition to monitoring the financial and statistical reports from health insurers as described in Chapter 4, PHIAC’s functions are: • to administer the Risk Equalisation Trust Fund • to administer the registration of private health insurers; • the information collection, compliance, enforcement, public information, agency cooperation; and • to advise the Minister about the financial operations and affairs of private health insurers. PHIAC supervisory objectives are met in the following ways: • reviewing compliance with solvency and capital adequacy standards • examining from time to time the financial affairs of the private health insurers • reviewing the value of assets and liabilities of each health benefit fund by carrying out independent actuarial assessments • the collection and review of audited financial and other returns so that PHIAC can monitor the financial position of the private health insurer and its ability to meet their outstanding claims as they fall due • the collection of signed statements and declarations from the Private health insurers and their approved auditors that provide PHIAC with assurance that systems and procedures to meet regulatory requirements are in place, are adequate and have been independently tested.

Authorised representatives and insurance brokers In addition to annual financial reporting requirements, under Section 912E of the Corporations Act, ASIC can undertake surveillance checks of AFS licence holders. ASIC has the power to vary licence conditions, as well as issue banning orders that prohibit a person from providing financial services.

PricewaterhouseCoopers | 61 2.5 Solvency and capital adequacy requirements

General insurance Under Section 28 of the Insurance Act, authorised insurers are required to hold eligible assets in Australia that exceed liabilities in Australia, unless otherwise approved by APRA. Section 116A of the Insurance Act and GPS 120 Assets in Australia provide further details of excluded assets and liabilities. The list of ineligible assets includes: • Goodwill; • Other intangible assets; • Net future income tax benefits; and • Assets under charge or mortgage (to the extent of the indebtedness). GPS 110 imposes an additional requirement – the insurer’s capital base must exceed the greater of $5 million and the minimum capital requirement. Where APRA is not satisfied as to the margin by which the capital base exceeds the minimum capital requirement, it will require the insurer to detail a capital plan identifying the proposed actions to improve solvency. The capital base is calculated by measuring available capital against the quality of the support provided by various types of capital instruments and the extent to which each instrument: • provides a permanent and unrestricted commitment of funds; • is freely available to absorb losses; • does not impose unavoidable servicing charges; or • ranks behind policyholders and creditors in the event of wind-up. Figure 2.2 summarises the calculation of the capital base. The minimum capital requirement can be calculated using either an internal model approved by APRA or by reference to APRA’s prescribed method. The minimum capital requirement represents an allowance for three types of risk: • Insurance risk – The possibility that the actual value of premium and claims liabilities will be greater than the value determined under prudential standards (GPS 310); • Investment risk – The risk that on-balance sheet assets and off-balance sheet liabilities will be realised at a different value to their reported amounts; and • Concentration risk – The largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to the concentration of policies, after netting out any reinsurance recoveries and allowing for the cost of one reinstatement premium for the insurer’s catastrophe reinsurance.

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Insurance risk comprises two components: outstanding claims risk and premium liability risk. Both must be valued to allow for a margin that results in a 75 per cent probability of sufficiency. The method for valuing liabilities is detailed in GPS 310, and is discussed in further detail in Chapter 4. It should be noted that premium liabilities are not brought to account for financial statements purposes and that it is possible for directors to decide a different outstanding claims liability is more appropriate for statutory reporting purposes. For capital adequacy purposes, any excess prudential margin over the 75 per cent sufficiency level, net of tax, can be included as part of the capital base. The actual capital charge for both risks is calculated using different capital factors for each class of business and for direct and inwards reinsurance business. The relevant factors are listed in Tables 2.3 – 2.6. The investment risk capital charge is calculated by classifying each asset according to its quality and multiplying it by an investment capital factor as determined by APRA. Adjustments are made for off-balance sheet exposures and assets subject to charge or guarantee. Where a significant exposure to a single asset (e.g. property) or counterparty (e.g. single reinsurer) exists, the insurer may have to hold additional capital depending on the credit rating of the counterparty. The relevant investment capital factors and counterparty grades are listed in Tables 2.3 – 2.6. Wholly owned subsidiaries that meet certain requirements may be consolidated in determining the investment risk capital charge. The concentration risk capital charge is equivalent to the maximum event retention including the cost of one reinstatement premium for the insurer’s catastrophe reinsurance.

GPS 110 Capital Adequacy GPS 110 Capital Adequacy requires that the general insurer’s capital base must exceed the greater of $5 million and the minimum capital requirement. As defined in figure 2.2, a general insurer’s capital base is made up of Tier 1 and Tier 2 Capital. Tier 1 Capital comprises the higher quality capital elements. The amount of Tier 1 Capital to be included in an insurer’s capital base is net of the following six deductions (the last three of which were introduced under the draft GGN 110.1 Measurement of Capital Base): • Goodwill; • Other intangible assets; • Deferred tax assets (net of provisions for deferred tax liabilities); • During the second and third transition periods, all recoveries on all reinsurance contracts if the insurer has not met the transitional reinsurance documentation requirements; • After the third transitional period, recoveries under each reinsurance contract that do not meet the reinsurance documentation test; and • For reinsurers, the premiums receivable deductions on any proportional reinsurance treaties. Key aspects of the calculation of the capital base are outlined on the following page.

PricewaterhouseCoopers | 63 Insurance risk capital charge: Reinsurance recoveries Reinsurance recoveries cannot be taken into account in calculating an insurer’s minimum capital requirement unless the reinsurance contract is appropriately documented and legally binding. APRA recognises that it may take some time for insurers to document all reinsurance contracts, and therefore, have introduced transition provisions. The issue of legally binding contracts is addressed in GPS 230 (refer section 2.7 below).

Treatment of proportional reinsurance treaties Net premium receivable in excess of the net premium liability and the capital charge relating to that net premium liability recorded by a reinsurer on a proportional reinsurance contract where the underlying risks have not yet been written by the direct insurer will be inadmissible as an asset. This will be achieved via a deduction from the reinsurer’s Tier 1 Capital.

General insurers in run-off This applies to an insurer that is not writing new business at the time of request for a reduction in capital and is running-off its existing insurance liabilities. The insurer must present its current financial position and a capital plan within insurance liabilities valued in accordance with GPS 310, except that the valuation must be at a minimum of 99.5 per cent level of sufficiency.

Reductions in capital A reduction in an insurer’s capital base is permitted subject to APRA’s prior approval. In GGN 110.1, if dividends and interest payments on Tier 1 Capital are wholly or partly funded from retained earnings, a reduction in the capital base may be allowed.

Investment concentration charge: Application to group exposures When there is an aggregation of group exposure, there is also to be a sub-aggregation by “grade” and that these sub-aggregations would then be subject to the specified limits.

Off-balance sheet transactions Under GGN 110.4 Investment Risk Capital Charge, unlimited exposures to any individual counterparties are not permitted. Exposures for an unlimited period of time will also not be allowed.

Counterparty grades: Use of rating agencies APRA has the long-term view of aligning the way in which counterparty grades are used to determine investment capital charges for insurers with the way in which counterparty grades are used for authorised deposit-taking institutions. For details on the treatment of ungraded counterparties or for which multiple grades exist, refer to the discussion paper, “Prudential Supervision of General Insurance Stage 2 Reforms – Capital, assets in Australia and custodian requirements”, released in October 2005.

Probable maximum loss and maximum event retention calculations In determining probable maximum loss (PML) and MER, an insurer should, at a minimum, adopt a single event approach. However, an insurer with a more complex portfolio of insurance risks may be required by APRA to estimate its MER and PML using a whole-of-portfolio approach.

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GPS 120 Assets in Australia GPS 120 Assets in Australia sets out requirements applying to general insurers in relation to when assets are eligible to be counted as assets in Australia. Section 28 of the Insurance Act requires that all insurers are to maintain assets in Australia of a value that equals or exceeds the total amount of the general insurer’s liabilities in Australia. APRA has thoroughly restructured the standard and the main changes are outlined below.

Legal developments Under the previous GPS 120, foreign securities held in depositories are not specifically excluded as assets in Australia. Under the revised prudential standard, assets that are not considered to be assets in Australia as interpreted by a court will be excluded. Accordingly, assets not considered as assets under the Insurance Act, such as foreign securities held through Australian depositories, will be expressly excluded from being considered as assets in Australia.

Investments in subsidiaries or Special Purpose Vehicles An insurer may set up either a company or a trust to act as an investment vehicle. APRA has introduced the concept of a Special Purpose Vehicle (SPV) which may either be a company or a trust. A look-through approach is applied to the assets held in an SPV so that assets of the SPV are treated as if they are directly held by the insurer for the purposes of determining assets in Australia. If a subsidiary has shares registered and transferable in Australia, then those shares will, prima facie, be treated as assets in Australia. However, APRA will have the power to declare the asset a non-Australian asset. With regards to a subsidiary, APRA’s decision will be dependent on the nature of the investment. The look-through approach will not apply to managed investment schemes. The claim on a managed investment scheme, usually in the form of units issued, will generally be considered an asset in Australia subject to some conditions.

Assets not included as assets in Australia APRA excludes loans to directors of the insurer, directors of related entities, a director’s spouse or unsecured loans to employees exceeding $1,000 from the calculation of assets in Australia.

GPS 231 Outsourcing This standard aims to ensure that all outsourcing arrangements involving material business activities entered into by a general insurer are subject to appropriate due diligence, approval and monitoring. The key requirements of the standard are: • A general insurer must have a policy relating to outsourcing of material business activities • A general insurer must have a legally binding agreement in place for all material outsourcing arrangements

PricewaterhouseCoopers | 65 • A general insurer must consult with APRA prior to entering agreements to outsource material business activities to a third party who conducts their activities outside Australia • A general insurer must notify APRA after entering into agreements to outsource material business activities.

Lenders mortgage insurance The main impacts on solvency and capital adequacy for LMIs were driven by GGN 110.6 and GRS 170.1 which came into effect on 1 January 2006 as follows: • The specification of the calculation of the MER charge that forms a significant part of the insurer’s minimum capital requirements. GGN110.6 details this calculation; • The implementation of reporting requirements to obtain a breakdown of the exposure underlying the PML by various loan attributes and to obtain more information about the reinsurance arrangements (outlined in GRS170.1); and • The change in the definition of “acceptable” mortgage insurance that determines the eligibility for ADIs to claim capital concessions. Specifically, the LMI will be required to be authorised by APRA or be domiciled in a country with similar prudential regulations. Where the LMI is wholly or partly owned by the ADI and the ADI is seeking capital concessions on the loans insured, the LMI must be authorised by APRA or meet comparable prudential requirements as set out in Attachment C of AGN 112.1 Risk Weighted On-Balance Sheet Credit Exposures. The model for calculating the MER charge involves the following: • The model is based on the hypothesis of a three-year downturn in the housing market; • The probabilities of default to be applied allow for a three-year horizon. These vary by loan-to-value ratio (LVR) and have been calibrated to create a stressed scenario of “catastrophic” loss that would happen once in every 250 years. The probability of claim in year two was calibrated to be twice that in year one and three. This “head- and-shoulders” scenario was similar to that observed during stressed periods; • The losses given default to be applied were allowed to vary with the LVR; • The seasoning factors allow for the age of the loans; • Additional capital penalties will be applied to non-standard loans, top cover or pool cover; • Available reinsurance recoveries over the three years can be recognised. Various constraints have been imposed in determining the extent to which recoveries can be recognised; and • An allowance for claims handling expenses has been made. The above changes are intended to ensure that the MER is at a more appropriate level and is risk-sensitive.

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Medical defence organisations On 26 March 2003, the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 was enacted. It provides a transitional period from 1 July 2003 to 30 June 2008 for medical defence organisations (MDOs) to meet the capital requirements associated with APRA’s Prudential Framework for General Insurers. Each prescribed MDO is required to lodge a funding plan with APRA, which demonstrates the achievement of APRA capital requirements before the end of the transitional period. The funding plan must be certified by the MDOs auditor and actuary. APRA has also used its power under the Financial Sector (Collection of Data) Act to apply the reporting requirements for general insurers to MDOs.

Life insurance The APRA prudential standards establish the two-tier capital requirement on the statutory funds of life companies. • Tier 1 (Solvency Requirement) requires a minimum capital requirement to ensure the solvency of the company. More specifically, to ensure that under a range of adverse circumstances, the company would be expected to be in a position to meet obligations to policyholders and other creditors in the context of a fund closed to new business, and which is either operating in a run-off situation or is to be transferred to another insurer. • Tier 2 (Capital Adequacy Requirement) is intended to secure the financial strength of the company to ensure that the obligations to, and reasonable expectations of, policyholders and creditors are able to be met under a range of adverse circumstances in the context of a viable ongoing operation. LPS 2.04 Solvency Standard broadly comprises the following components: • Solvency liability – A calculation of the value of the guaranteed policy liabilities on the basis of assumptions that are generally more conservative than best-estimate assumptions; • Other liabilities – The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements; • Expense reserve – To provide for the loss of contribution from non-commission acquisition charges, which occurs upon closing a statutory fund to new business; • Resilience reserve – To allow for adverse movements in investment markets to the extent they will not be matched by corresponding movements in the liabilities (including an impact due to credit risk); and • Inadmissible assets reserve – To cover risks associated with holdings in associated financial entities and concentrated asset exposures.

LPS 3.04 Capital Adequacy Standard broadly comprises: • Capital adequacy liability – A calculation of the value of liabilities on the basis of assumptions that are generally more conservative than the solvency liability assumptions;

PricewaterhouseCoopers | 67 • Other liabilities – The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements; • Resilience reserve – Similar to the solvency requirements, except movements are more adverse (and also now captures impact due to credit risk); • Inadmissible assets reserve – As per the solvency requirements, except it excludes reserve for assets dependent on the continuation of the business; and • New business reserve – To provide for the solvency of the fund, assuming a planned level of new business over three years. LPS6.03 Management Capital Standard prescribes the minimum capital requirement to be held outside the statutory funds to ensure that under adverse circumstances the company would be able to meet its trading commitments and adequately service its policyholders. APRA PS3 Prudential Capital Requirement complements LPS 6.03. The standard indicates that the minimum capital value is $10 million for life insurers (friendly societies, nil). This capital must be maintained as excess assets and at least 50 per cent must be in the form of eligible assets. According to APRA, a life insurance company will need to independently comply with the requirements of the prudential standard PS 3 and prudential standard LPS 6.03. However, the two requirements are not additive. PS 3 will, generally, result in capital over and above that needed to comply with LPS 6.03 only to the extent that: • the amount of capital established by LPS 6.03 is less than that prescribed by PS 3; and • the type of capital used in satisfying LPS 6.03 does not comply with the prescribed form of capital required by PS 3. Subject to approval from APRA, statutory funds must not be invested in related companies other than subsidiaries. The following assets are inadmissible for solvency purposes: • An asset with a value that is dependent upon the continuation of the business; • Holdings in an associated entity which is an institution itself subject to legislated minimum capital requirements; and • Assets which breach asset concentration thresholds.

Health insurance Authorised health insurers are subject to solvency and capital adequacy tests under Schedule 2 and 3 of the Private Health Insurance (Health Benefits Fund Administration) Rules 2007. These tests were legislated under Divisions 140 and 143 of the Private Health Insurance Act. Standards for capital adequacy and solvency were issued along with an interpretation standard and were applicable from 1 July 2005. (Health Benefit Organisations – Capital Adequacy Standard 2005, Health Benefit Organisations – Solvency Standard 2005, Health Benefit Organisations – Interpretation Standard 2005.)

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The standards place rigorous reporting requirement on funds. They need to demonstrate the soundness of their financial position, considering both their existing balance sheet position and the profitability of future business. The Health Legislation Amendment Act specifies a two-tier capital requirement for health benefits funds, with each tier considering the capital requirements of a different set of circumstances. AS2.04 Solvency Standard is a short-term test that prescribes the minimum capital requirements of a health benefits fund to ensure that under a wide range of circumstances it would be in a position to meet its obligations to members and creditors. The solvency standard is essentially based on a “run-off” view of the fund. It must demonstrate that it can reliably meet its accrued liabilities and obligations in the event of a wind-up. It should be noted that there is a difference between meeting the solvency standard and being solvent in terms of the Corporations Act. A fund meeting the solvency standard is required to hold reserves to meet its obligations to members and staff, such that it should be in a position to avoid insolvency as defined under the Corporations Act. AS3.04 Capital Adequacy Standard is a longer-term test that prescribes the capital requirement of a health benefits fund to ensure that its obligations to, and reasonable expectations of, contributors and creditors can be met under a range of adverse circumstances. The capital adequacy requirement is thus based on an ongoing view that requires a fund to show that it has sufficient capital to implement its business plans, accept new business, absorb short-term adverse events from time to time and remain solvent. The interpretation of the standard sets out and explains the components used in applying the solvency and capital adequacy standards. The standards are based on the concepts of liability risk, asset risk and other risks.

Liability risk The liability risk can be considered as the amount required to meet existing liabilities (solvency and capital adequacy standard) plus an amount to meet the liability associated with continuing to write business (capital adequacy standard). The amount required to meet existing liabilities is set as the sum of the: • Net claims liability; • Risk equalisation accrued liability; and • Other liabilities. The net claims liability is outstanding claims net of risk equalisation on outstanding claims and the liability in respect of unexpired risk (determined as the contributions in advance multiplied by a specified loss ratio). Each item includes a margin and includes associated claims handling expenses. The margin is prescribed at 10 per cent for the solvency calculation, while the capital adequacy margin is determined by the board (subject to a prescribed minimum of 12.5 per cent) based on a qualitative risk assessment of the fund’s membership base and the volatility of claims. For both the solvency and capital adequacy standards, the net claims liability should not be less than the reported liability.

PricewaterhouseCoopers | 69 The risk equalisation accrued liability is the amount due/payable from the risk equalisation trust fund in the coming period in respect of members covered and benefits paid from prior periods. The liability is thus the risk equalisation levy for members covered in the preceding quarter, less benefit payments that can be recovered from the risk equalisation trust fund. A margin is added to the risk equalisation levy (currently 10 per cent).

Other liabilities are the normal outstanding business obligations The capital adequacy standard is also concerned with the additional capital required to continue to cover members’ future benefits (referred to as the renewal options reserve) and to fund business plans (referred to as the business funding reserve). The renewal options reserve takes into account the risks and potential costs associated with providing members with the right to renew membership. The reserve is based on a best-estimate projection of the net earned contribution income less incurred payments and costs, with suitable conservative margins added to the cash outflows in the projection. The projections have been amended within the new standard, with a major difference being the allowance for investment income on outstanding claims provisions. The business funding reserve is intended to ensure solvency over the projected period. It requires an insurer to hold sufficient reserves to meet the demands of any planned increase in membership and of other business development strategies.

Asset risk The asset risk is the risk to the value of assets supporting the liabilities. Asset risk can be considered in two parts: • Inadmissible assets; and • Resilience reserve. Inadmissible assets include assets in associated entities and risks from asset contagion, asset concentration and general asset credit or liquidity. The new standard changes the amount of loan assets or credit exposures permitted. The factors considered in calculating the inadmissible asset reserve are as follows: • A reserve must be maintained if the value of a business’ assets in a run-off situation is less than the value of the assets in an ongoing situation; • If the health benefits fund has investments in an associate or subsidiary that is prudentially regulated, a reserve must be maintained that represents the prudentially regulated capital within the value of the associate or subsidiary in the financial statements of the health benefits fund; and • A reserve is required to be held against the adverse impact of concentration of investments in a particular asset with a particular counterparty or related party. The capital adequacy standard prescribes certain limits and weightings depending on the asset type. The resilience reserve is based on an assessment of the fund’s ability to sustain shocks that are likely to result in adverse movements in the value of its assets relative to its liabilities. The reserve is calculated with reference to the admissible assets of the fund and by applying

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a calculated diversification factor (based on each fund’s asset exposure) to a prescribed movement in returns per investment class. The resilience reserve is intended to provide protection against adverse movement in the value of assets. The reserve considers the fall in value of assets by the investment sector under adverse conditions, assuming greater adversity in the capital adequacy test. An offset is allowed for diversification of assets.

Other risks In addition, the standards require an allowance for management capital and, in the solvency test, for an expense reserve. The management capital reserve is designed to ensure that health funds maintain a minimum dollar level of capital. In practice, this test applies only to small funds. The expense reserve, in the run-off test, allows for unavoidable expenses expected to be incurred as a fund adjusts to a run-off status. The solvency standard calculates the expense reserve as 40 per cent of total non-claim expenses.

Authorised representatives and insurance brokers The minimum solvency requirements under the AFSL regime are: • Positive net assets; • Sufficient cash resources to cover the next three months’ expenses with adequate cover for contingencies; and • Surplus liquid funds of greater than $50,000 where the licensee holds client assets of more than $100,000. Further conditions may be set out under the AFSL itself. Compliance with these requirements is tested through audits undertaken by the licensee’s auditor both annually and at the request of ASIC.

PricewaterhouseCoopers | 71 2.6 Investment policy

General insurance There are no absolute restrictions on investments that may be held by insurance companies except the trust account requirements of the Financial Services Reform (FSR) Act 2001. Under Section 1017E of the FSR Act, which applied from 11 March 2002, where monies received cannot be applied to the issue of a product within one business day of receipt (i.e. unmatched cash), the monies must be held in a trust account. Details of the requirements for trust accounts are described in “authorised representatives and insurance brokers” earlier in this chapter. However, in calculating the minimum capital requirement of an insurer under GPS 110, the capital charge assigned to each asset type is given a different weighting, taking into account its nature and the credit rating of any counterparties. These are detailed in Tables 2.3 – 2.6. Significant individual exposures may require an additional capital charge. APRA also has the power under Section 49N to direct an insurer to record an asset at a specified value, subject to approval of the Federal Treasurer.

Life insurance There are no absolute restrictions on investments that may be held by life insurance companies subject to similar capital requirements for certain assets as outlined above. Under Section 1017E of the FSR Act, which applied from 11 March 2002, where monies received cannot be applied to the issue of a product within one business day of receipt (i.e. unmatched cash), then the monies must be held in a trust account. Details of the requirements for trust accounts are described earlier in this chapter.

Health insurance There is no restriction on investments that may be held by health benefits funds. However, in calculating the solvency requirement and the capital adequacy requirement under the respective standards, the level of capital required varies with the risk profile of the investment portfolio. This is addressed through the calculation of an inadmissible assets reserve and a resilience reserve.

Insurance brokers and authorised representatives Authorised representatives and insurance brokers are required to hold monies in a trust account with an ADI, cash management trust or an ASIC-approved foreign deposit-taking institution. The authorised representative or insurance broker is required to disclose to the insured that they intend to keep any interest earned and must deposit the monies into such an account on the day it is received or on the next business day. Funds held in a trust account can be invested in a broad range of investments (such as government bonds), but the rules relating to this are complex and should be considered in detail. Typically, any investment requires a written agreement as to the arrangements, which will address issues such as how investment earnings and losses are shared.

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ASIC has issued a class order which provides limited relief to insurance brokers regarding their ability to pay money into a trust account under Section 981B of the Corporations Act 2001. The class order CO 04/189 allows other money paid in a single sum together with client monies to be paid into a trust account established and maintained under Section 981B of the Act by a financial services licensee who is an insurance broker. Section 981B generally permits only client monies to be paid into the trust account. The class order relief allows payment into an insurance broker’s trust account of mixed payments; however, non-client money can only be held in the account for a maximum of five business days.

2.7 Reinsurance

General insurance Through its paper, Refinements to the General Insurance Prudential Framework released on 31 July 2007, APRA proposed modifications and clarifications to its prudential framework to give effect to the Government’s announcement in relation to Direct Offshore Foreign Insurers (DOFIs) and, more generally, to recognise different categories of insurer based on risk profiles. This paper was updated on 19 December 2007 as a response to industry submissions. The proposals were finalised on 2 April 2008. Drafts have been issued as at December 2007 for the affected Prudential Standards. The final standards are scheduled for release in early June 2008. The current reinsurance reporting requirements along with the impending changes are discussed below.

GPS 230 The main Prudential Standard applying to reinsurance for General Insurance companies is Prudential Standard GPS 230 Reinsurance Management (GPS 230). GPS 230 aims to ensure that a general insurer, as part of its overall risk management framework, has a specific reinsurance management framework to manage the selection, implementation, monitoring, review, control and documentation of reinsurance arrangements. These systems, together with the structures, processes, policies and roles supporting them, are referred to as a general insurer’s risk management framework. There must be a clear link between this framework and the insurer’s Reinsurance Management Strategy (REMS), following Prudential Standard GPS 220 Risk Management subparagraph 10(e). The current GPS 230 requires that a general insurer: • has in its reinsurance management framework a documented REMS, sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls; • submits its REMS to APRA on an annual basis and re-submits when any material changes are made (note that draft GPS 230 released in December 2007 removes the annual basis requirement, hence a general insurer will only submit its REMS when material changes are made);

PricewaterhouseCoopers | 73 • submits a Reinsurance Arrangements Statement (RAS) detailing its reinsurance arrangements to APRA at least annually; and • makes an annual reinsurance declaration (RD) based on the “two-month rule” and “six-month rule” and submits the declaration to APRA. The four concepts above; reinsurance management framework, REMS, RAS, and RD are explained below.

Reinsurance management framework and REMS The reinsurance management framework should include both reinsurance and retrocession arrangements and have a clear link to the risk management strategy. It should include clearly defined management responsibilities and controls, policies and procedures to manage the selection, implementation, monitoring, review, amendment and documentation of reinsurance arrangements of the general insurer, and a written, board- approved REMS. The REMS should document the objectives and strategy for reinsurance management including the risk appetite of the general insurer, the policies for setting and monitoring aggregate retentions and upper limits on policies, the methods for choosing appropriate reinsurance participants and the process used for setting and monitoring the MER. Members of global groups are expected to provide details of global reinsurance arrangements. Although APRA does not specify absolute limits on cessions, it has indicated that a prudent level of ceded business would be no greater than 60 per cent for direct insurers and 90 per cent for captive insurers, following GPG 245 subparagraph 4(b). The general insurer is also required to have this reinsurance management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurer’s operations and the extent of any change in the reinsurance program or risk appetite. As with the risk management strategy, the REMS is subject to an annual review by the approved auditor, providing limited assurance to APRA that the insurer has complied with the REMS at all times during the reporting period.

Reinsurance arrangements statement (RAS) General insurers are required to submit a RAS. This is evidence of the implementation of the REMS and details: • schematics of the insurer’s reinsurance program that depict retention levels, aggregate deductibles, policy layers, stop-loss policies, reinstatements, loss participation clauses and event limit clauses; • the parameters for each class of business that represent the highest potential loss exposure and how the program reduces the gross loss to the general insurer; and • details of the MER calculation including modelling of catastrophes, PML and realistic disaster scenarios.

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If the reinsurance program has a common date of renewal then this statement is due annually within two months of the renewal date. If there are multiple inception dates then this statement must be submitted to APRA every six months.

Reinsurance declaration (RD) General insurers are also required to submit an annual RD to APRA on the same day that the yearly statutory accounts are due. This declaration must be signed by both the CEO and the chief reinsurance officer (CRO) and state that all reinsurance arrangements placed are “legally- binding” under either APRA’s “two-month” or “six-month” rule. Draft GPS 230 (December 2007) clarifies this requirement by stating that if the CEO and the CRO are the same person, the RD must be signed by that person and another person to be agreed upon with APRA. The “two-month” rule states that within two months of the inception date, the general insurer either: • has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers and contains a slip wording, with no outstanding terms or conditions to be agreed; or • has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers, with no outstanding terms or conditions to be agreed; or • does not have a placing slip, but has a cover note issued by the participating reinsurer (in the case of direct placements with reinsurers) or from its appointed reinsurance broker (in the case of intermediated reinsurance placements). The insurer also must have systems to verify that the content of the cover note is the same as the placing slip agreed between the insurer and the reinsurer. The “six-month” rule requires that within six months of the inception date, the general insurer either: • has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers and contains a slip wording, with no outstanding terms or conditions to be agreed; or • has in its possession a full treaty contract wording (including any appending contract wordings and/or schedules) that has been signed and stamped by all contracting parties, namely the insurer and all participating reinsurers. If there are any reinsurance arrangements in place that do not meet these requirements then they should be disclosed on the declaration. Recoveries arising from these arrangements will not be eligible for inclusion as Tier 1 Capital (thus reducing the insurer’s capital adequacy) subject to the transition rules described below. The transition rules given in Prudential Standard GPS 110 Capital Adequacy (GPS 110) state that recoveries from reinsurance arrangements which do not meet the requirements above will not be deducted from Tier 1 Capital as long as: • For the first year of transition, 60% of the total reinsurance recoveries for the insurer are derived from reinsurance arrangements which comply with the “two-month” or “six-month” rule.

PricewaterhouseCoopers | 75 • For the second year of transition, 80% of the total reinsurance recoveries for the insurer are derived from reinsurance arrangements which comply with the “two-month” or “six-month” rule. For an insurer with a 30 June balance date, the first year of transition will end at 29 June 2008 and the second year at 29 June 2009. For an insurer with a 31 December balance date, the first year of transition will end at 30 December 2008 and the second year at 30 December 2009. The full transition rules and dates are provided in GPS 110 attachment H. After the end of the second year of transition, all recoveries from each reinsurance arrangement which does not meet the “two-month” or “six-month” rule will be deducted from the insurer’s Tier 1 Capital, unless dictated otherwise by APRA.

Premium recognition clarification In letters to General Insurers dated 31 March 2006 and 5 January 2006, APRA clarified that reinsurers are required to recognise inwards premium revenue from the date of the acceptance of the reinsurance risk by the reinsurer. For proportional reinsurance, this premium is recognised based on the Gross Net Premium Income to be written by the insurer under the contract. For excess of loss, the premium is recognised on the basis of the agreed minimum/ deposit premium, which will be subject to a final adjustment factor applied to the final declared values of the premium determinant. The treatment above was developed to address the differing nature of the reinsurance and direct contracts written of the insurer. The reinsurer has entered into a contractual commitment to accept all risks ceded to the reinsurance treaty and must, therefore, also hold adequate capital to cover such risks.

GPG 245 To assist insurers in complying with the requirements of GPS 230, APRA released Prudential Practice Guide GPG 245 Reinsurance Management Strategy (GPG 245) as part of its Stage 2 reforms. This practice guide outlines prudent practices in relation to reinsurance management. APRA is currently updating the guide to take into account the forthcoming changes to its prudential framework. Draft GPG 245 (December 2007) is available on the APRA website.

Proposed changes to prudential framework affecting reinsurance The proposals to General Insurance prudential framework which affect reinsurance requirements are summarised below. These were extracted from APRA’s paper: Response to Submissions – Refinements to the General Insurance Prudential Framework released on 19 December 2007.

Reinsurance recoverables In situations where non-APRA-authorised reinsurers do not lodge security in Australia for amounts recoverable from them by ceding companies, those ceding companies will be required, after 12 months since the date of loss, to be subject to capital charges that match the unsecured recoverables. This requirement is proposed to respond to the greater risk associated with settlement of reinsurance recoverables from non-APRA-authorised reinsurers by ensuring greater security of these recoverables.

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The following changes will apply to reinsurance arrangements entered into after 31 December 2008: • Reinsurance recoverables from non-APRA-authorised reinsurers on outstanding claims provisions which are not supported by suitable security arrangements in Australia to be subject to 100 per cent capital factor one year after the end of the financial year in which the claims giving rise to the recoverables occur. • Any guarantees or letters of credit provided as security arrangements in Australia to be provided by an authorised deposit-taking institution (ADI). For reinsurance contracts entered into before 31 December 2008, no additional capital charges to apply until 30 June 2012 with the full 100 per cent capital factor not applying until 30 June 2013.

Reinsurance contracts Reinsurance contractual requirements for arrangements entered into on or after 31 December 2008 are: • Reinsurance contracts to be subject to Australian law with any disputes to be heard in an Australian court. • Reinsurance recoverables to be payable to the insurer in Australia and no other payment mechanism to be substituted for convenience. These requirements would not apply to contracts entered into before 31 December 2008.

Investment capital factors on reinsurance assets The existing investment risk capital factors applying to reinsurance assets will be increased by 50 per cent for reinsurance assets from non-APRA-authorised reinsurers from 31 December 2008 (e.g. apply 3 per cent instead of 2 per cent for grade 1 & 2 reinsurers).

Intra-group reinsurance With the imminent implementation of insurance group supervision, the current temporary concessions on intra-group reinsurance exposures will be discontinued from 30 June 2008. Transitional arrangements will be considered for the affected insurance groups on a case-by- case basis.

Government schemes to limit gross exposure

Medical indemnity insurance Two schemes cover doctors with medical indemnity insurance, the High Cost Claims Scheme (HCCS) and the Exceptional Claims Scheme (ECS). HCCS aims to minimise the impact that large claims may have on the ability of medical indemnity insurers to provide cover. It covers half the cost of each medical indemnity claim over $300,000, up to a cost of $20 million per claim.

PricewaterhouseCoopers | 77 ECS assumes liability for 100 per cent of any damages payable against a doctor that exceed the doctor’s insurance contract limit. The doctor must have medical indemnity insurance cover to at least $20 million for claims notified from 1 July 2003. The ECS will cover the same events and incidents as the doctor’s insurance policy, but will not cover claims from the treatment of public patients in public hospitals or claims from the treatment of patients overseas.

Terrorism insurance The Terrorism Insurance Act 2003 rendered terrorism exclusion clauses ineffective and established the Australian Reinsurance Pool Corporation (ARPC) to manage a scheme for terrorism insurance coverage for commercial property, business interruption and public liability businesses. The scheme was in response to the progressive withdrawal of cover by insurers and reinsurers in the aftermath of the September 11, 2001 terrorist attacks. The scheme began on 1 July 2003 and covers any declared terrorist incident, except damage from nuclear causes. Various types of coverage are also excluded. There is a two-tier reinsurance premium structure under the scheme. Insurance companies pay an initial standard rate (based on the class of business covered and geographical location of the property) and are expected to build up a $300 million pool of funds over three years. There is a maximum post-terrorist event rate (again based on the class of business covered and geographical location of the property) for replenishing the scheme in the event of a major incident. The $300 million pool will be supplemented by another $10 billion from the Australian Government. Insurance companies must retain $1 million of claims cost per annum when reinsuring with the ARPC.

Life insurance APRA introduced new and amended prudential standards, as a result of amendments to the Life Act made under the SRR Act. A new standard, Prudential Standard LPS 230 Reinsurance (LPS 230), is in effect from 1 January 2008. This standard replaces two pre-existing prudential rules relating to the reporting of reinsurance arrangements (PR 23) and reinsurance contracts requiring approval (PR 24).

LPS 230 The key requirements of LPS 230 are: • a life company must give APRA a reinsurance report on its reinsurance arrangements for the financial year within 3 months after each financial year; and • a life company must not enter into reinsurance arrangements of a certain type unless approval has been granted by APRA. These are primarily contracts that contain elements of financial reinsurance. Such contracts and details surrounding the application for approval are outlined in attachment B of LPS 230. The reinsurance report must set out the particulars of each reinsurance contract or group of reinsurance contracts in force between the company and a reinsurer during the financial year.

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The report must also set out the opinion of the company’s appointed actuary on: • whether the company’s reinsurance arrangements during the financial year and the way in which it administered those arrangements were adequate and effective; and • whether the company’s reinsurance arrangements during the financial year have been accounted for in accordance with the prudential standards in force under section 230A of the Life Insurance Act.

Reinsurance management framework Prudential Standard LPS 220 Risk Management (LPS 220) requires a life company to have in place a risk management framework, including risk management policies, controls and procedures which identify, assess, monitor, report on and mitigate all material risks likely to be faced by the life company. This risk management framework must also address risks arising out of reinsurance arrangements. Prudential Practice Guide LPG 240 Life Insurance Risk and Life Reinsurance Management (LPG 240) provides guidance to assist life companies in complying with the requirements of LPS 220 in relation to insurance risk and reinsurance management. LPG 240 also outlines prudent practices in relation to good life insurance risk and reinsurance management.

Health insurance Registered Health Benefits Organisations (RHBOs) do not typically carry reinsurance. However, private health funds participate in the risk equalisation arrangements administered by the Private Health Insurance Administration Council (PHIAC). This scheme was introduced to ensure that private health insurance can be made available and affordable to all Australians as health funds will be less deterred from insuring riskier customers. This is done by redistributing the burden of high cost claims across the industry to avoid the financial strain of the costs being borne by individual funds. The redistribution is calculated based on the average benefit paid by Australian health funds (per state) to customers in their aged-based pool (over 55 years old) and the high costs claimants pool (claims exceeding $50,000 each). The arrangements operate by RHBOs paying a levy into a Health Benefits Risk Equalisation Trust Fund. RHBOs prepare and submit membership and benefit data to PHIAC on a quarterly basis, also known as PHIAC 1 returns. Effectively, a fund that paid more than the state average will have an amount receivable from PHIAC, whereas a fund that paid less will have an amount payable to PHIAC.

Authorised representatives and insurance brokers Authorised representatives and insurance brokers do not require reinsurance.

PricewaterhouseCoopers | 79 3 | Policyholder protection

3.1 Developments 82 3.2 Framework 82 3.3 Financial services license 83 3.4 Product disclosure, insurance business and insurance contracts 85 3.5 Pricing and competition 87 3.6 Sales practice regulation 89 3.7 Ability to pay claims 90 3.8 Use of personal information 91 3.9 Sources of redress 92

PricewaterhouseCoopers | 81 3.1 Developments On 3 May 2007 the Minister for Revenue and Assistant Treasurer announced a package of measures to enhance the integrity of the general insurance in Australia. The minister announced that direct offshore foreign insurers (DOFIs) will become subject to prudential regulation, though amendments to the Insurance Act 1973.

3.2 Framework The insurance industry exposes providers and policyholders to a variety of risks, including credit risk, market risk, event risk and operational risk. Every provider carries these risks to varying extents depending on the nature of the promises made to policyholders. Prudential regulation is largely about managing these risks in a way that supports the promises made to policyholders. Frameworks for policyholder protection in insurance markets differ around the world. However, since the Wallis Inquiry of the late 1990s, the Australian policyholder protection framework has been founded on the following three strands of regulatory supervision: • Australian Prudential Regulation Authority (APRA) – Solvency of insurance providers and prudential regulation to protect the interests of policyholders in ways that are consistent with the development of a viable, competitive and innovative insurance industry; • Australian Securities and Investments Commission (ASIC) – Policyholder protection and the market integrity of insurance providers; and • Australian Competition and Consumer Commission (ACCC) – Fairness and competition in the insurance industry. The framework is complemented by general legislation governing conduct and disclosure for all industries, including insurance. The objectives of the Australian policyholder protection framework and the key mechanisms and activities that regulators have put in place to support the framework are explained below. The key objectives of policyholder protection are to ensure: • Prudential supervision of authorised insurers • Product disclosure – Providing policyholders with all relevant information upon which to base an informed decision • Pricing and competition – Offering policyholders a range of insurance products in a competitive environment • Sales practice regulation – Providing sales advice and customer service of the highest possible standard • Ability to pay claims – Maintaining sufficient capital and resources to pay claims as they fall due • Use of personal information – Storing and using information provided by policyholders appropriately and

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• Sources of redress – Offering adequate sources of redress in the event of policyholder dissatisfaction.

Insurance Council of Australia – Code of Practice The ICA released a new Code of Practice in July 2005 for general insurers. The only types of general insurance that are not covered by the Code are reinsurance and the lines of business that are covered by specific government statute, such as workers compensation and compulsory third party (CTP). Participation in the new Code continues to be discretionary. The key objectives of the Code are: • to promote better, more informed relations between insurers and their customers; • to improve customer confidence in the general insurance industry; • to provide better mechanisms for the resolution of complaints and disputes between insurers and their customers; and • to commit insurers and the professionals they rely upon to high standards of customer service. A summary of the national legislation and codes that provide the regulatory backbone for policyholder protection in the insurance industry is provided on the next page.

3.3 Financial services license

Financial services license requirements

Corporations Act 2001 In accordance with the Governments intention that anyone carrying an insurance business in Australia, either directly or through the actions of another, must become an authorised insurer, the Corporations Act 2001 (see schedule 2) will as at 1 July 2008 be amended to the effect that a financial services licensee, or an authorised representative of a financial service, must not deal in a general insurance product unless they are: • A general insurer within the meaning of of the insurance act • A Lloyds underwriter within the meaning of the act • A person in respect of whom a determination is in place.

PricewaterhouseCoopers | 83 Table 3.2 – Policyholder protection – An overview

Industry Commonwealth Legislation Supervision

Financial Insurance Trade Price National Lifetime Medical General Brokers Corporations Life Insurance Privacy Services Contracts Practices Surveillance Health Health Indemnity Code of Code of Act Act Act Act Reform Act Act Act Act Cover Act Practice Practice Act

Regulatory Licence ACCC/ Privacy IBDF/ APRA APRA ASIC ACCC ASIC FICS PHIAC PHIO PHIAC HIC/ APRA IOS Body requirements ASIC Commissioner IBCC

Product and Insurance 3 3 3 3 3 3 3 3 Pre Business/ Sale contracts

Pricing and competition 3 3 3 3

Sales Sale practice 3 3 3 3 regulation

Ability to pay claims 3 3 3 3

Sources of Claim redress 3 3 3 3 3 3 3

Use of personal 3 information Policyholder protection | 3

3.4 Product disclosure, insurance business and insurance contracts

Product disclosure requirements

Financial Services Reform Act 2001 Consumers need clear and relevant product information that is directly comparable to information on other products in the insurance market. This ensures they can make informed decisions on which products best suit their needs. It also helps give the industry a reputation for reliability and honesty. The most stringent requirements for ensuring appropriate product disclosure are set out in the Financial Services Reform Act 2001 (FSR Act, incorporated in the Corporations Act 2001 – Chapter 7), which builds upon the standards established in the Insurance Contracts Act 1984. The FSR Act disclosure regime applies to most types of insurance with the exception of health insurance, workers compensation and CTP. The FSR Act licensing regime does not apply to APRA-licensed insurers who only have wholesale clients. In general, the FSR Act requires insurers to give product documentation to consumers before they buy a product. However, they can provide documentation up to five days after issuing risk insurance products but only if the consumer asks for the product to be issued immediately and it is not feasible to give them documentation before issuing the product. Product disclosure documentation must be kept up to date for the lifespan of the product. The required disclosures include: • a financial service guide that includes information about the services provided, such as details of remuneration, commission, benefits, conflicts of interest and dispute resolution mechanisms • a statement of advice setting out any personal advice given to a consumer and the basis on which it was given and • a product disclosure statement (PDS) detailing information on significant benefits and risks of the product, such as its features, expected returns, applicable tax rates, dispute resolution procedures, and the extent to which environmental, social and ethical considerations have been taken into account when making investment decisions. Telephone sales also fall within the scope of this legislation. Consumers must be: • clearly informed of the importance of using a PDS in making a decision • given the option of having the PDS read out over the telephone • given a PDS before becoming bound to buy a product • contacted only between 8am and 9pm, excluding Sundays and certain public holidays and • given an opportunity to be placed on a “no contact” register. These restrictions apply only to telephone sales to retail clients.

PricewaterhouseCoopers | 85 Non-compliance with the FSR Act Non-compliance with the FSR Act may attract financial penalties or imprisonment for up to five years. ASIC has the power to impose a range of administrative penalties on insurers, including suspension, variation or revocation of their licence.

Insurance Contracts Act The Insurance Contracts Act places additional disclosure and procedural requirements on general insurers, such as: • detailed requirements pertaining to policy and claim limitations and disclosures • when arranging a new policy for home or motor insurance, the insurer must ask specific questions associated with the risk to be insured, otherwise the duty of disclosure will be deemed to be waived • when renewing policies, the insured has a duty of disclosure as to matters that would increase the risk of the insurer • the insurer must advise the intention and rate of renewal at least 14 days prior to expiry of existing policy, otherwise the policy is automatically renewed with no premium • an unpaid instalment can prevent claim payment only if this is made clear to the insured and it is overdue by at least 14 days; • building insurance covers purchases until sale completion or possession of the building • the insured must be informed if liability cover is on a claims-made basis and • insurers must disclose averaging provisions clearly and in writing.

Insurance Act 1973 The Financial Sector Legislation Amendment (Discretionary Mutual Fund and Direct Offshore Foreign Insurers) Act 2007 amends the Insurance Act to seclude from the definition of “insurance business” reinsurance business carried on by: • A body corporate incorporated in a foreign country or • A unincorporated body established, under a law of a foreign country. The amendments also set out the circumstance under which it is taken that a person is carrying on insurance business in Australia.

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3.5 Pricing and competition

The Trade Practices Act (TPA) 1974 was enacted to address: • anti-competitive and unfair market practices • mergers and acquisitions of companies • product safety and liability; and • third-party access to facilities of national significance. All state and territory governments have their own fair trading and consumer laws that mirror, or are based on the TPA, thereby extending the same principles to workers compensation and CTP insurers. In December 2003, part VII A of the TPA absorbed the prior requirements of the Prices Surveillance Act 1983. The three key functions of this Act were: • to vet proposed prices of any business organisation under prices surveillance • to hold enquiries into pricing practices and related matters and to report on these findings to the Treasury and • to monitor prices, costs and profits of an industry or business, again reporting to the Treasury.

Medical indemnity insurers Under the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003, the provision of medical indemnity products has been regulated to require minimum coverage of $5 million on a claims-made basis. Since 1 July 2003, medical indemnity insurers (MIIs) have not been able to offer insurance on a claims-incurred basis. However, by taking out extended reporting benefit policies, which are purchased many years in advance, doctors may be able to avoid buying medical indemnity insurance after retirement. In 2004, the Australian Government commissioned a study (in consultation with the Australian Medical Authority and medical indemnity providers) to examine options for long-term arrangements for retirement of doctors. As a result, legislation was introduced (effective July 2004) to establish the Run-off Cover Scheme (ROCS) to provide affordable medical indemnity cover to medical practitioners upon retirement. ROCS is funded by a levy on MIIs, at a rate of 8.5 per cent of premium income for the four years from July 2004. MIIs are then expected to on-charge the levy to practitioners (the “funding levy”), with appropriate disclosure on premium notices. MIIs receive fees from the Medicare Australia to cover: • claims handling costs for eligible retirement claims • the cost of issuing practitioner eligibility certificates for ROC and • the cost of implementing systems to administer ROCS. With effect from 1 July 2003, only registered insurers, including those owned by Medical Defence Organisations (MDOs), are permitted to offer medical indemnity insurance.

PricewaterhouseCoopers | 87 Health insurance The Australian Government closely controls competition in the health insurance industry. While price differentiation is possible within the framework of a community rating scheme, the Government must approve any rise in premium rates that exceeds the Consumer Price Index (CPI) inflation rate. Product differentiation is also limited and levels of coverage are regulated. Private health insurers are also subject to Lifetime Health Cover (LTHC) legislation, which came into effect on 1 July 2000. Under this law, premiums are held at a base rate for all members joining before the age of 30. Premiums for new policyholders are subject to a two per cent loading for each year after the age of 30. Therefore people who join early in life will be charged lower premiums than people who join later. LTHC is designed to encourage more people to join at a younger age and maintain their membership over their lifetime. In January 1999, the Australian Government introduced a 30 per cent tax rebate on all health insurance premiums. This rebate applies to all Australians who are eligible for Medicare and are members of a private health fund. Policyholders may obtain this rebate in three ways: • as a lower premium rate • as a rebate on their annual income tax return or • as a cash payment from the Medicare office. Health insurers are responsible for ensuring all policyholders are aware of the rebate and that it is implemented appropriately. In addition, the Government’s “gap cover” initiatives seek to reduce out-of-pocket expenses incurred by policyholders. Such gap cover schemes offer 100 per cent coverage of a member’s hospital costs when the member is treated in a hospital that has an agreement such as the Hospital Purchasers Provider Agreement, or similar, with the fund. When the doctor also has an agreement with the hospital, these schemes enable health funds to pay benefits higher than the Medicare Benefits Schedule fee. With these agreements, health funds will be able to provide members with 100 per cent cover, not only for hospital costs but in-hospital medical costs as well. The schemes have been facilitated by the introduction of simplified billing whereby registered doctors and hospitals bill the health fund directly.

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3.6 Sales practice regulation The FSR Act aims to ensure policyholders get quality sales advice and service by requiring advisers to: • have appropriate skills and knowledge and • adhere to prescribed conduct and disclosure standards.

Skills and knowledge Under the FSR Act, all providers of financial products or financial advice must hold an Australian Financial Services Licence (AFSL) or be appointed as an authorised representative of a licence holder. Licence holders are required to: • have documented procedures to monitor and supervise the activities of representatives to ensure they comply with financial services laws • ensure all representatives who provide financial services are competent to provide those services • maintain records of all training undertaken • meet ongoing educational requirements and • ensure “responsible officers” meet ASIC standards for knowledge and skills. All advisers and representatives giving financial advice must be trained to the standards set out in ASIC’s Policy Statement 146.

Conduct and disclosure standards FSR Act requirements that relate to service standards include the following: • Insurers must confirm, electronically or in writing, the issue, renewal, redemption or variation of policies within a reasonable time frame. • Insurers must offer a 14-day “cooling-off” period during which customers have the right of return. This period starts on the earlier of the following dates: the date the confirmation requirements have been met, or the end of the fifth day after the product is issued or sold to the consumer. For risk insurance products, the amount refunded can be reduced in proportion to the period that has passed before the right of return is exercised. • Consumers must be given the option to register a “no contact, no call” request, similar to marketing consents required under the Privacy Act 1988. As AFSL holders, insurers are required to maintain a register of all authorised representatives and ensure that their representatives provide services honestly, efficiently and fairly. Other requirements of the FSR Act relating to policyholder protection include: • compliance measures that are consistent with Australian Standard 3806 on compliance programs (this is the minimum standard, not the only way);

PricewaterhouseCoopers | 89 • internal procedures for dealing with complaints. These must meet the standards set out in ASIC’s Policy Statement 165; and • procedures for keeping client money in a trust account that is separate from the licensee’s or representative’s own account.

3.7 Ability to pay claims There are presently no compensation funds to cover claims against insolvent insurers. The focus in this area is establishing appropriate risk-based solvency standards and appropriate regulatory supervision, which are discussed in detail in Chapter 2.

Medical indemnity assistance The medical indemnity legislation, introduced by the Australian Government in 2002, is designed to contribute towards the availability of medical services in Australia. The package of legislation allows the Government to provide financial assistance to MDOs and MIIs to help these organisations keep medical indemnity insurance premiums at an affordable level. The Medical Indemnity Act 2002 enables participating MDOs and MIIs to make claims under four medical indemnity schemes which are administered by Medicare Australia on behalf of the Government. • Incurred But Not Reported (IBNR) – Designed to fund the IBNR liabilities of MDOs where they do not have adequate reserves to cover their liabilities. The Act provides that all MDOs that existed on 30 June 2002 may participate in the IBNR scheme unless the Minister for Revenue determines otherwise. As at October 2005, the Minister had determined that United Medical Protection Limited is the only MDO to participate in the IBNR indemnity scheme. • High Cost Claim Scheme (HCCS) – Enables the Government to fund 50 per cent of the cost of payouts by MDOs and MIIs that are greater than the applicable threshold amount, up to the limit of a practitioner’s indemnity cover. • Run-Off Cover Scheme (ROCS) – A reinsurance run-off vehicle to assist MDOs and MIIs in respect of claims made against a private medical practitioner who has retired, is on maternity leave or has permanently left private medical practice in Australia. • Exceptional Claims Scheme (ECS) – Designed to assist MDOs and MIIs where settlement amounts of claims exceed a practitioner’s indemnity insurance contract limit.

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3.8 Use of personal information All private insurance companies and agents became subject to amendments to the Federal Privacy Act from 21 December 2001. The legislation governs collection and use of personal information by most private companies within Australia, via the application of the following 10 National Privacy Principles: • collection • anonymity • use and disclosure • data security • data quality • openness • access and correction • trans-border data flows • identifiers and • sensitive information. The legislation formalises many existing standards within the insurance industry, such as the General Insurance Information Principles. Small companies (with turnover of less than $3 million), political parties, government agencies and state and territory authorities are generally excluded from this legislation. However, federal public sector organisations are bound by the National Privacy Principles set out in the Privacy Act. Compliance with the privacy regulation is monitored by the Privacy Commissioner, who has the authority to impose penalties proportional to the seriousness of the breach. These include actions such as the pursuit of damages through the federal courts, financial compensation to the policyholder, cessation of activities which led to the breach and public naming of the offender with details of the breach published in the annual report. Since 2001, there has been a marked increase in privacy legislation and most states and territories have some form of regulation. For example, New South Wales-based companies are governed by the Privacy and Personal Information Protection Act 1998. Victoria introduced its own Information Privacy Act in 2000 (effective September 2002) and a Health Records Act in 2001 (effective July 2002). All other states and territories have passed legislation or issued statements advocating privacy for all companies based on Commonwealth principles. This patchwork of regulation was acknowledged by the Privacy Commissioner in the 2004–2005 review of the private sector provisions of the Privacy Act which recommended, among other things, clarifying jurisdictional issues.

PricewaterhouseCoopers | 91 3.9 Sources of redress Complaints procedures to address any breakdown in policyholder protection are well established across the industry. Licence holders are accountable for losses suffered by retail clients as a result of the actions of their representatives. The FSR Act requires all insurance companies to have clearly documented internal dispute resolution procedures for retail clients, and to belong to an external dispute resolution scheme which meets ASIC-approved standards.

General insurance Complaints in the general insurance industry are dealt with by the Insurance Ombudsman Service (formerly known as the Insurance Enquiries and Complaints Scheme, established in December 1993). It provides a national dispute resolution service developed by the ICA to handle enquiries and complaints and to resolve disputes between policyholders and insurers. The determination of third-party disputes (i.e. complaints against another person’s insurer) is limited to disputed amounts of $3,000 or less. The service operates at two tiers. Consumer consultants operate at the first tier to respond to enquiries and encourage resolution of complaints. If a dispute remains unresolved following the tier one processes, it can be referred to the second tier. At this tier, a panel, referee or adjudicator offers applicants an impartial and authoritative alternative to litigation. Binding determinations can be made by an adjudicator for amounts not exceeding $5,000 and by a panel or referee for amounts not exceeding $150,000 where the claim does not exceed $290,000. A panel or referee may also make recommendations for an amount greater than $150,000 but not exceeding $290,000, where a claim does not exceed $290,000. The panel determines most disputes but when fraud is alleged, the matter is determined by a referee. Decisions of the scheme are binding on all participating insurers where amounts are less than $150,000. However, the scheme can also recommend settlements up to $290,000. ASIC has approved the scheme. From 1 January 2004, the terms of reference of the scheme were extended to include underwriting agents and MIIs as members. It now also deals with non-claims disputes as well as disputes involving small businesses, classified as retail clients under the FSR Act. Complaints related to workers compensation and CTP are subject to state and territory procedures in certain circumstances. These include the Motor Accidents Authority, the NSW Workcover Authority, the Transport Accident Commission and the Victorian Workcover Authority.

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Life insurance The Financial Industry Complaints Service (FICS) was originally established by the life insurance industry to assist in the resolution of policyholder complaints about insurance policies issued by its members. FICS has the authority to investigate, negotiate and conciliate policyholder complaints against any of its members in the industry. This extends to reinsurers registered under the Life Insurance Act 1995 and authorised representatives and insurance brokers related to the industry. FICS has since expanded to include complaints relating to financial planning, managed investments and stockbrokers. FICS operates in a manner similar to the Banking Ombudsman. However, it has an independent panel to make determinations, rather than an ombudsman. Any decision can be referred to an adjudicator if less than $10,000 or to a panel if greater than $10,000. Claims can be up to $250,000. The panel is headed by an independent chair and includes industry and consumer representatives. Initially, FICS liaises with both the policyholder and the insurance company to reconcile the differences that gave rise to the complaint. Both parties are expected to abide by the panel’s decision; however, the policyholder cannot be prevented from exercising their legal rights. ASIC has approved the service.

Health insurance Health insurance complaints are handled by the Private Health Insurance Ombudsman (PHIO), as authorised by the Government. PHIO provides a free service to consumers to assist with health insurance problems and enquiries. It also deals with complaints from health funds, private hospitals or medical practitioners regarding health insurance arrangements.

Insurance brokers Insurance Brokers Disputes Limited (IBD) is a free consumer service. Its role is to handle complaints and help resolve problems between insurance brokers and other financial services providers (other than insurance companies) and their clients. It is an ASIC-approved external dispute resolution scheme. IBD provides support to help resolve problems quickly and efficiently without having to resort to costly litigation. Anyone who has a problem with their insurance broker or financial service provider concerning a general or life insurance policy can contact IBD. IBD covers a range of policies, including motor vehicle, home building and contents, sickness and accident, life, consumer credit, travel, personal and domestic property, up to a claim limit of $50,000. IBD also handles complaints regarding small business pack policies up to a claim limit of $5,000. IBD does not handle some cases, such as those already involved in legal proceedings. In addition, IBD does not handle disputes involving claims of more than the limits listed above, except where the insurance broker or financial service provider and its professional indemnity insurer have agreed to waive the limit.

PricewaterhouseCoopers | 93 4 | Financial reporting

4.1 Developments 96 4.2 Framework 101 • Australian Accounting Standards Board 101 • Australian Securities Exchange 102 • Private Health Insurance Administration Council (PHAIC) 102 • Medicare Australia 102 • Australian Prudential Regulation Authority 104 • Australian Securities And Investments Commission 104 • Life Insurance Actuarial Standards Board (ceased with effect from 31st December 2007) 105 4.3 Accounting standards 105 4.4 Annual accounts 124 4.5 Other returns 127 4.6 Key dates 133

PricewaterhouseCoopers | 95 4.1 Developments

Phase ii of the iasb’s insurance project All Australian companies are required to produce financial statements that comply with Australian equivalents to International Financial Reporting Standards (AIFRS) for reporting periods beginning on or after 1 January 2005. However, the local and global accounting for insurance contracts is still to be fully harmonised. Due to the numerous and complex treatments adopted by insurers around the world, the International Accounting Standards Board (IASB) decided that international convergence on accounting for insurance contracts would not be achieved within the time scale set for adoption of the other International Financial Reporting Standards (IFRS). As a result, the IASB’s Insurance Project was split into two phases. The objective of Phase I was to produce an international standard defining an insurance contract, make limited improvements to accounting practices (while grandfathering most of the current territory treatments) and provide insights into the key risk drivers and sensitivities of insurance contracts through improved disclosures. Phase II aims to address the broader conceptual and practical issues related to insurance accounting, with a particular focus on the measurement of transactions arising from insurance contracts.

Phase I Phase I was completed on 31 March 2004 when the IASB issued IFRS 4 Insurance Contracts. In Australia this was replicated by the Australian Accounting Standards Board’s (AASB) release of a new standard, AASB 4 Insurance Contracts, and a revision of the Australian insurance standards already in place resulting in AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. The update of these standards incorporated some of the recommendations arising from the HIH Royal Commission and meant that policies issued by registered health benefits organisations (RHBOs) were considered as general insurance contracts. Australia had one of the leading-edge accounting frameworks for insurance in the world, and already had a focus on market value accounting for insurance business. As a result the measurement impacts arising from Phase I were relatively modest.

Phase II: Time scale Phase II was restarted upon completion of phase I and the IASB set up an Insurance Working Group to advise them on the project. A discussion paper was released in early May 2007, outlining the IASB’spreliminary views on the proposed enhancements to accounting for insurance contracts.

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The next stage will be to produce an exposure draft of a new standard based on submissions and industry feedback on the paper. This is expected to take at least 18 months from the release of the discussion paper and the final standard is not anticipated for at least another 12 months after that. It is likely therefore that the international standard on accounting for insurance contracts will not be released until the first half of 2010 at the earliest. When the IASB issues the accounting standard arising from phase II, the AASB will replace AASB 4, AASB 1023 and AASB 1038 with a single insurance accounting standard that is harmonised with the IASB standard.

Phase II: Discussion paper The IASB issued apaper dealing with accounting for insurance liabilities and insurance assets. It did not consider the definition of insurance contracts as these were dealt with in Phase I. It raises a number of specific questions for which the IASB is seeking comment. Some of the key features of the discussion paper include: • The proposed basis of measurement for insurance liabilities is line with the current requirements of AASB 1023, including central estimates, discounting and the adoption of risk margins. Life insurers are likely to be more impacted than general insurers. The proposed discount rates would refer to current market discount rates and not the risk-free rates currently required by AASB 1023. • Acquisition costs would be expensed as incurred, rather than deferred over the life of the insurance contracts (different from AASB 1023 , AASB 1038 and AASB 118 Revenue). • Risk margins would be determined for a portfolio of insurance contracts that are subject to broadly similar risks and are managed together as a single portfolio. Risk margins would not be able to reflect the benefits of diversification between portfolios (diversified benefits are currently allowed in Australia). • Reinsurance assets would need to include a discount to allow for the probability of losses from default or disputes. • The IASB is undecided as to whether an insurer should present premiums as revenue or as deposit receipts. • The IASB is undecided as to whether it should address any accounting mismatches between the fair value through profit or loss value of assets baking unit-linked contract liabilities and the liabilities which are measured using a current exit value basis (the current exit value basis is the estimated valued for which the risk and obligations of the portfolio would be transferred to another entity). • The impacts above will present some disclosure challenges to insurers. Consideration of the responses to that Discussion Paper will help take the project forward to its next stage, the issuance of an exposure draft, currently expected in late 2009 (although this may slip). Four months after the deadline for comments, this paper considers the responses received by the IASB to the Discussion Paper. It notes the key themes and issues emerging and reflects on proposed next steps from the IASB. It also considers some ‘external’ influences around the IASB’s project, such as the development of the Solvency II regulatory regime

PricewaterhouseCoopers | 97 in Europe and the FASB’s expected decision over whether to participate with the IASB in a joint project. In addition to the summary responses, IASB staff produced three other papers for the February Board meeting. One of these presented a project plan which set out the issues that must be addressed in the form of a series of questions that the IASB must answer over forthcoming meetings. No timetable was imposed, although the subjects were divided into eight separate Board meetings with an acknowledgement that these were highly unlikely to be eight consecutive meetings. On the basis that the first in-depth discussions are unlikely to take place until the May or even June IASB meeting, it appears that an exposure draft before the end of 2009 will represent a challenging objective. The other papers produced for the February meeting dealt with two particular issues that featured heavily amongst the responses received, notably ‘Accounting for the whole contract’ and ‘Settlement value as a candidate measurement attribute’. In order to take matters forward as effectively as possible the IASB has made a decision to reconstitute the Insurance Working Group (‘IWG’) that provided significant input to the development of the Discussion Paper. The group met on 1 and 2 April 2008 and discussed some of the key contentious issues set out above prior to recommendations being made to the Board itself. The membership of the IWG has been reassessed with a wider reflection of views sought through increased user participation with the appointment of more analysts to the group, including Andrew Crean (Citigroup) from the UK and William Wilt (Morgan Stanley) from the US.

Phase II: Convergence The IASB has stated that an important priority of the insurance project is convergence with US standards, wherever possible and when feasible under the IASB conceptual framework, and consistency with other IASB projects (such as the Revenue Project). The US standard setter, the Financial Accounting Standards Board (FASB) has expressed an interest in participating in a “modified joint project” in respect of insurance. This would mean that, following analysis of the comments received on the phase II discussion paper, the IASB and the FASB would undertake a joint project with the objective of issuing identical or substantially similar standards. In August 2007, the FASB issued an Invitation to Comment that incorporated the IASB’s Discussion Paper in order to gather views as to whether it should add to the FASB’s agenda a joint project with the IASB on insurance contracts. Views were sought by November 2007, the same timetable as the IASB was operating to in requesting responses to its Discussion Paper. The FASB Invitation to Comment highlighted the increasingly international scope of the insurance industry, including the cross-border activity of many insurers. Accordingly, the need for international comparability between insurers competing on global capital markets is made apparent. The FASB paper also sets out some perceived benefits of the IASB’s preliminary views in the Discussion Paper compared to current US GAAP, and concludes that the great majority of proposals will result in improvements or simplifications over current US accounting.

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The FASB has indicated that it will make a final decision as to whether to join the project in quarter three of 2008 and, to assist in its deliberations on this subject, it will discuss the responses received in its Insurance Forum on 6 May 2008.

Apra’s new reporting framework for life companies From 1st January 2008, APRA has introduced a new reporting framework for life insurers and friendly societies, involving Life Reporting Standards (LRSs), Life Reporting Forms (LRFs) and instructions. The new reporting requirements have been given legal effect through LRSs determined under the Financial Sector (Collection of Data) Act 2001. These reporting requirements are broadly consistent with those used for general insurers, superannuation funds and authorised deposit-taking institutions. The new framework includes 13 new forms that replace 53 forms for life companies (that were previously required under PR 26 and PR 35) and 31 different forms for friendly societies (that were previously required under PR 47 and PR 48). • LRS & LRF 100.0 Solvency; • LRS & LRF 110.0 Capital Adequacy; • LRS & LRF 120.0 Management Capital; • LRS & LRF 210.0 Derivatives, Commitments and Off-Balance Sheet Items; • LRS & LRF 220.0 Large Exposures; • LRS & LRF 300.0 Statement of Financial Position; • LRS & LRF 310.0 Statement of Financial Performance; • LRS & LRF 330.0 Summary of Revenue and Expenses; • LRS & LRF 340.0 Retained Profits; • LRS & LRF 400.0 Statement of Policy Liabilities; • LRS & LRF 410.0 Capital Measurement Statistics; • LRS & LRF 420.0 Asset Backing Policy Liabilities; • LRS & LRF 430.0 Sources of Profit; • LRS & LRF 901 Transitional Arrangements 2008. Following the introduction of the new prudential standards and reporting standards, the following prudential rules for Life Companies and Friendly Societies have been revoked or superseded: • PR15 Consequences of Transfer of Policy between Statutory Funds; • PR18 Single Bank Account for Statutory Funds; • PR22 Participating, Non-Participating Benefits;

PricewaterhouseCoopers | 99 • PR23 Requirement for Report of Reinsurance; • PR24 Reinsurance Contracts Needing Approval; • PR26 Collection of Statistics; • PR27 Starting Amount; • PR28 Distribution of Shareholders’ Retained Profits; • PR35 Financial Statements; • PR47 Friendly Society Financial Statements; • PR48 Collection of Statistics – Friendly Societies; • PR49 Contract Classification for the purpose of regulatory reporting to APRA; A transitional reporting standard, LRS 901 Transitional Arrangements 2008 also requires life companies to submit the returns applicable under the previous reporting regime for the 1st quarter of 2008.

Health insurance – PHIAC returns

New PHIAC reporting requirements For reporting after the March quarter 2007, PHIAC issued revised templates for PHIAC 1, PHIAC 3 and PHIAC 4. A revised PHIAC 2 template is expected to be issued as well.

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4.2 Framework Insurers’ financial reporting is governed by the Corporations Act, regulatory requirements and, where an insurer or its parent is listed on the Australian Securities Exchange (ASX), the listing rules. The pronouncements of the Life Insurance Actuarial Standards Board (LIASB) also affect the preparation of financial statements by life insurance companies. The responsibilities of each of these bodies drive the financial reporting requirements and are summarised below. The inter-relationship between the bodies is illustrated in Figure 4.1. The Corporations Act contains no reporting requirements that are specific to insurers. Chapter 2M of the Act, relating to financial reports and audit, is applicable to insurance companies. Importantly, Section 296 requires companies to prepare their financial reports in accordance with accounting standards and to give a true and fair view (Section 297). Accounting standards are issued by the AASB under Section 334 of the Corporations Act, and there are now three specific standards in relation to the insurance industry: • AASB 4; • AASB 1023; and • AASB 1038. It should be noted that some RHBOs are not structured as companies and hence are not governed by the Corporations Act. Their governing legislation is typically state or territory- based, however, they are also required to prepare financial statements in accordance with AASB standards.

Australian Accounting Standards Board The AASB is constituted under Section 226 of the Australian Securities and Investments Act 1989. It is overseen by the Financial Reporting Council, which is responsible for appointing members of the AASB and determining its priorities and overall direction. The council cannot direct the AASB in relation to the issuing of a particular standard. The AASB’s primary responsibility is to develop accounting standards in general purpose financial reporting. The objective of general purpose financial reporting is to “provide information useful to users for making and evaluating decisions about the allocation of scarce resources”. Users are broadly divided into three groups: • Resource providers; • Recipients of goods and services; and • Parties performing a review or oversight function. Management and regulatory bodies, such as APRA and PHIAC, are excluded from these user groups as they have the power to determine the form and content of information to be provided to them in special purpose financial reports.

PricewaterhouseCoopers | 101 Hence, the AASB is not required to consider the interests of APRA or PHIAC in determining general purpose financial reporting requirements, although the interests of policyholders, as recipients of services and providers of capital, must be considered.

Australian Prudential Regulation Authority

General insurance The current regulatory regime for general insurers results in major differences between the reporting requirements of APRA and those under the Corporations Act. The recognition of premium liabilities under GPS 310 Audit and Actuarial Reporting and Valuation differs from AASB 1023 General Insurance Contracts. In addition, it is possible that company directors could elect to adopt a different prudential margin for Corporations Act reporting from that prescribed by the APRA prudential standards. Consequently, the results of insurers reflected in annual audited Insurance Act returns differ from the general purpose financial report prepared under the Corporations Act. See Table 4.5 below for more details of the differences between the two regimes.

Life insurance and friendly societies APRA develops financial reporting requirements in line with its responsibilities to policyholders. To meet the financial reporting requirements of Financial Sector (Collection of Data) Act, From 1st January 2008 life insurers and friendly societies are required to comply with APRA’ new reporting standards. The new reporting standards replace the previous requirement on regulatory financial statements under PR 35 (for life companies) and PR 47 (for friendly societies) and previous requirement on collection of statistics under PR26 (for life companies) and PR 48 (for friendly societies). Under the new reporting framework, life insurance companies are required to provide quarterly reports in unaudited form (forms 100.0 – 340.0) and annual report (forms 100.0 – 430.0) in audited form in respect of each financial year. At the time of printing audit requirements are still being finalised. See section 4.1 for the list of new standards.

Australian Securities And Investments Commission ASIC enforces and regulates company and financial services laws to protect consumers, investors and creditors. The Australian Securities and Investments Commission Act 2001 requires ASIC to: • uphold the law uniformly, effectively and quickly; • promote confident and informed participation by investors and consumers in the financial system; • make information about companies and other bodies available to the public; and • improve the performance of the financial system and the entities within it.

102 | Insurance facts and figures 2008 Figure 4.1 – Overview of relevant financial reporting lines

Australian Securties Exchange Australian Securities Corporations Act 2001 Insurance Act 1973 National Health Act 1953 Medical Indemnity and Investments Life Insurance Act 1995 Act 2002 Commission Act 1989 Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC regulates companies and financial services, and promotes investor, creditor and consumer protection under the Australian Securities and Investments Commission Act; Corporations Act; Insurance Act 1973; Insurance Contracts Act 1984; Superannuation (Resolution of Complaints) Act 1993; Life Act; Retirement Savings Accounts Act 1997; and the Superannuation Industry (Supervision) Act 1993.

Australian Securities Exchange The ASX is a private, profit-making entity that is responsible for managing Australia’s primary securities market. The ASX is responsible for establishing listing rules and business rules for companies and stockbrokers respectively. As a listed entity, the ASX is also subject to the listing rules. In response to recent corporate collapses, the ASX Corporate Governance Council has developed a set of guidelines, Principles of Good Corporate Governance and Best Practice Recommendations. This document articulates 10 core principles that the Council believes underlie good corporate governance. Each principle is explained in detail and implementation guidance is provided in the form of best practice recommendations. A listed entity must lodge the information set out in Appendix 4E of the listing rules (preliminary final report) with the ASX. The information must be given to the ASX immediately as it becomes available and no later than when it lodges any accounts with ASIC or the regulatory bodies in the jurisdiction in which it is established. The information must be lodged no later than two months after the end of the accounting period. All listed entities must also give their annual report to the ASX when they lodge them with ASIC. Listed entities must also give the ASX a copy of any concise report at the same time.

Private Health Insurance Administration Council PHIAC is an independent statutory authority that regulates the private health insurance industry. PHIAC administers the reinsurance arrangements, collects and publishes industry statistics, administers the simplified billing arrangements and monitors the solvency and capital adequacy of private health insurers. All health insurance funds must provide PHIAC with returns prepared in accordance with the guidelines set out in PHIAC circulars. The guidelines state that the accounts and returns should comply with Australian accounting standards. Private health insurance policy is set down by the Commonwealth Department of Health and Ageing.

Medicare Australia Medicare Australia is responsible for the administration of the Medicare system and the Australian Government’s dependant on their age bracket (30%, 35% or 40%) rebate for persons up to 65 years old, 65-70 years old or 70 years and over respectively. Rebate scheme, which sees persons eligible for Medicare benefits reimbursed with a percentage of any private health insurance premiums paid to a RHBO. Many RHBOs will administer this rebate on behalf of their members and claim reimbursement directly from Medicare Australia.

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Life Insurance Actuarial Standards Board (ceased with effect from 31st December 2007) The LIASB was established under the Life Insurance Act 1995 and was responsible for developing actuarial standards for the life insurance industry relating to the actuarial techniques to apply in the valuation of liabilities and the determination of capital requirements for life insurance companies. From 1st January 2008, the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) transferred the responsibility for actuarial standards from the Life Insurance Actuarial Standard Board (LIASB) to APRA. As a result, LIASB ceases its operation as at 31st December 2007. Actuarial standards have been now reissued as APRA’s prudential standards.

4.3 Accounting standards

General insurance Australian general insurers are required to prepare financial statements that comply with AIFRS. AASB 4 Insurance contracts, defines what constitutes an insurance contract. AASB 1023 General Insurance Contract defines a general insurance contract (i.e. an insurance contract that is not a life insurance contract as defined in the Life Act), and a non-insurance contract (a contract regulated by the Insurance Act that does not meet the AASB 4 Insurance contracts definition of insurance). AASB 1023 prescribes accounting treatment for: • General insurance contracts (including general reinsurance contracts) that a general insurer issues and to general reinsurance contracts that it holds; • Certain assets backing general insurance liabilities; • Financial liabilities and financial assets that arise under non-insurance contracts; and • Certain assets backing financial liabilities that arise under non-insurance contracts. The treatment of the remaining balances, transactions and operations of a general insurer are prescribed by the AIFRS applicable to these transactions or balances. The following figure illustrates the key accounting standards for general insurance activities.

PricewaterhouseCoopers | 105 Figure 4.2 – Key AIFRS reporting standards for general insurers

Reporting of General Insurance Activities

AASB 7 Insurance General Insurance Financial Financial Contracts Contracts (issued Instruments: e.g. AASB 138 Instruments July 2004 and Recognition Intangible Assets updated and Measurement & AASB 136 September 2005) Impairment of Assets

Australian Applies to general Applies to contracts Applies to balances Applies to all entities equivalent of insurance contracts regulated as such as goodwill Enhanced IFRS 4 Insurance which meet the insurance contracts and intangible disclosers on Contracts definition per which no longer assets for acquired financial risks and Applies to AASB 4 meet the definition business now managed Enhanced insurance contacts per AASB 4 disclosure Prescribes the not captured by requirements AASB 1023 or accounting relating to general treatment of AASB 1038 such insurance contracts as fixed-fee financial assets Certain and liabilities service contracts, modifications to e.g. roadside accounting for assistance general insurance contracts

AIFRS introduced few fundamental changes in the treatment of insurance transactions as territory requirements were essentially grandfathered by the IASB until the completion of phase II of its Insurance Project. However, a significant amount of extra disclosure is required that attempts to give the user “insights into the key risk drivers and sensitivities” in respect of insurance contracts. The key principles and disclosure requirements of AASB 1023, and any departures from the previous version, are described below. The standard is comprehensive in dealing with many accounting issues, including: • Definition of insurance risk; • Definition of an insurance contract; • Definition of premium revenue and earning pattern; • Measurement of outstanding claims; • Explicit risk margins; • Fair value accounting of investments backing general insurance liabilities; • Deferral of acquisition costs and liability adequacy testing for unearned premiums; • Accounting for inwards reinsurance; • Portfolio transfers within a group; • Non-insurance contracts; and • Financial statement disclosure principles and requirements.

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Definition of an insurance contract AASB 4 and AASB 1023 include a definition of an insurance contract. An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Insurance risk Insurance risk is risk other than financial risk. Financial risk is defined as the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

Significant risk Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. A contract that transfers financial risk alone, or only insignificant amounts of insurance risk, is treated under AASB 139, to the extent that it gives rise to a financial asset or financial liability.

General insurance contracts AASB 1023 deals with those contracts that meet the definition of a general insurance contract. General insurance contracts are defined as insurance contracts that are not life insurance contracts i.e. insurance contracts that are not governed by the Life Act.

Definition of premium and earning pattern The revised AASB 1023 clarifies the measurement of premium revenue. Premium revenue comprises premiums from direct business (including underwriting pools written by the entity) and premiums from reinsurance business (including underwriting pools written by other members of the pool). They cover anticipated claims, reinsurance premiums, administrative, acquisition and other costs, and a profit component. Premium revenue includes fire service levies collected from policyholders as there is no direct nexus between fire brigade charges and the levy that insurers charge policyholders. The fire brigade expense is brought to account in accordance with the earning of the premium to which it relates. In contrast, stamp duty and the Goods and Services Tax (GST) effectively represent collection of tax on behalf of the government and are therefore not included as revenue of the insurer. Premium revenue is recognised from the risk attachment date in accordance with the pattern of the incidence of risk. The revised AASB 1023 provides additional guidance on how the pattern of the incidence of risk is determined. Premiums received in advance are recognised as part of the unearned premium liability. Unclosed business is estimated and the premium relating to unclosed business included in premium revenue. Premium revenue is only recognised as

PricewaterhouseCoopers | 107 income when it has been earned, which is in proportion to the incidence of the risk covered over the life of the insurance contract. Measuring premium revenue involves: • Estimating the total amount of premium revenue; • Estimating when claims are expected to occur, and hence estimating the pattern of risk exposure, which provides the earning pattern; and • Recognising the premium when it is earned. For most contracts the period of the contract is one year and the exposure pattern of the incidence of the risk will be linear. For some reinsurance contracts written on a “risk attaching” basis, a 12-month contract may result in up to 24 months of exposure. The insurer must also recognise a liability item on the balance sheet for the unearned premium, where this exists.

Measurement of outstanding claims The revised AASB 1023 requires that the liability for outstanding claims “… shall be measured as the central estimate of the present value of expected future payments for claims incurred with an additional risk margin to allow for the inherent uncertainty in the central estimate”. The previous standard did not require a central estimate of the expected payments and there was no mention of an explicit risk margin. Expected future payments include amounts related to: • Unpaid reported claims; • Claims incurred but not reported (IBNR); • Adjustments in light of the most recently available information for claims development and claims incurred but not enough reported (IBNER); and • Claims handling costs. The liability for outstanding claims ought to reflect the amount that, if set aside at balance date, would accumulate to enable payment of claims as they fall due. The standard requires that outstanding claims should be discounted to net present value unless the claims are to be settled within a year and the discounting would not have a material impact. While it does require outstanding claims in all classes of business to be discounted, it recognises that such discounting will have significant application to “long tail” classes of business (mainly liability, Compulsory Third Party (CTP) and workers compensation) where a high proportion of such claims are settled outside a 12-month period. The revised AASB 1023 requires that the discount rate or rates selected should be “risk- free rates that are based on current observable, objective rates that relate to the nature, structure and term of the outstanding claims liabilities…typically government bond rates”. The former AASB 1023 required discount rates to be determined by reference to market- determined, risk-adjusted rates of return appropriate to the insurer.

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The revised standard requires that expected future payments should account for future claim cost escalation created by inflation and superimposed inflation. Superimposed inflation is defined as the level of inflation in excess of normal economic inflation indices. The disclosure of superimposed inflation assumptions differs between companies. Some companies make explicit disclosures while others include superimposed inflation within composite inflation assumptions.

Regulatory valuation GPS 310 sets out the requirements for the valuation of the insurance liabilities for regulatory reporting. Where an insurer’s board decides not to accept the approved actuary’s valuation of insurance liabilities or to adopt a valuation (higher or lower) not in accordance with the principles of this standard, details should be included in the insurer’s published annual financial report. For the main differences in treatment between financial reporting and APRA regulatory reporting, see Table 4.5.

Explicit risk margins Under AASB 1023, an additional explicit risk margin is required to be included as part of the outstanding claims liability. The margins are set with regard to the robustness of the valuation models, available data, past experience and the characteristics of the classes of business written. For outstanding claims, since the risk margin is applied to the net liability, the risk margin should also allow for uncertainty in reinsurance and other recoveries due. Similar to the APRA requirements, risk margins can allow for diversification. The risk margin for the entire company can then be allocated to individual classes of business.

Assets backing general insurance liabilities The initial AASB 139 Financial Instruments: Recognition and Measurement (issued July 2004) included a free choice option to designate any reliably measurable financial asset at fair value through profit or loss. The July 2004 versions of AASB 1023 and AASB 1038 compelled insurers to take this option for financial assets they had determined as backing their insurance liabilities. However, in response to feedback from, amongst others, the European Central Bank and the European Commission, the IASB, and consequently the AASB, introduced restrictions on the ability to designate financial assets as fair value through profit or loss. Amendments made in June 2005 (and effective for accounting periods beginning on or after 1 January 2006) now only permit designation when doing so results in more relevant information because either: • it eliminates or significantly reduces an accounting mismatch that would arise from measuring assets or liabilities (or recognising the gains and losses on them) on different bases; or

PricewaterhouseCoopers | 109 • the instrument forms part of a group of financial assets and/or financial liabilities that are managed on a fair value basis in accordance with a documented risk management or investment strategy and information about the group is provided internally on that basis to the entity’s key management personnel. For insurers the first reason for designation is the most often cited because of the allowance to continue to manage their assets backing insurance liabilities on a fair value basis under AASB 1023 and AASB 1038. Note that this does not affect the treatment of those financial assets that are classified as held for trading (i.e. acquired principally for the purpose of selling or repurchasing in the near term, or are part of a portfolio for which there is evidence of recent short-term profit taking) as these are automatically designated as fair value through profit and loss.

Deferral of acquisition costs and liability adequacy test for unearned premium AASB 1023 requires that acquisition costs, including commission and brokerage paid, incurred in obtaining and recording insurance policies shall be deferred and recognised as an asset if it is “…probable that they will give rise to premium revenue that will be recognised in the income statement in subsequent reporting periods”. AASB 1023 also requires the application of a LAT to the unearned premium liability. If the present value of the expected future cash flows relating to future claims arising from the current contracts plus an additional risk margin exceed the unearned premium liability less related intangible assets and related deferred acquisition costs, then the entire deficiency shall be recognised, first by writing down any intangible assets and then DAC. If additional liability is required it is recognised as an unexpired risk liability. This treatment differs from the previous standard, where only the DAC asset was written down. General insurers are permitted to use a probability of adequacy that is different to that to be used for outstanding claims, provided that the reasons for using a different rate are disclosed. The LAT shall be performed at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio.

Inwards reinsurance The revised AASB 1023 requires that inwards reinsurance business should be accounted for in line with the general principles established for direct business. Essentially, the standard requires companies underwriting inwards reinsurance to take responsible steps to estimate and bring to account “unclosed premiums” and to recognise such premiums as earned, having regard to the spread of risk of underlying policies ceded under inwards reinsurance treaties. On the claims side, the standard requires inwards reinsurance business to be accounted for in a similar manner to direct business. Outstanding claims should have regard to IBNRs and future claims development, and also be discounted to their net present value. The standard allows reinsurers some latitude. It requires compliance only when the information received is reasonably reliable.

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Non-insurance contracts Contracts that are regulated under the Insurance Act that fail to meet the definition of insurance risk described above are referred to as non-insurance contracts. Financial assets and liabilities arising from such contracts are to be treated according to AASB 139. Similarly to assets backing insurance liabilities described above, the financial assets and liabilities arising from non-insurance contracts are required by the revised AASB 1023 to take the fair value option under AASB 139, where this is permitted.

Portfolio transfers within a group Where the responsibility in relation to claims on transferred insurance business remains with the transferring insurer, the transfer shall be treated as reinsurance. As such, the acquiring insurer agrees to meet the claims. However, the contractual responsibility of the original insurer remains.

Disclosure requirements AASB 7 Financial Instruments: Disclosure (AASB 7) affects every entity with financial instruments and applies to annual periods beginning on or after 1 January 2007. The requirements expand on existing financial instrument disclosure found in AASB 132 Financial Instruments: Disclosure and Presentation and amends certain disclosure requirements in AASB 4 Insurance Contracts for insurance companies. Some of the additional disclosures are likely to require considerable effort to prepare in 2007 because of the nature of the disclosures and the requirement to also disclose prior year comparatives.

Overview of requirements • AASB 7 impacts all entities, even if their financial instruments are limited to simple instruments such as cash, accounts payable and receivable, investments and borrowings. • AASB 7 requires entities to disclose their financial risks, including how they are manager, based on information used by key management personnel in performing this. • AASB 7 requires entities to measure and disclose the amount by which equity and profit or loss could change from what is reported at the balance sheet date, should market conditions (such as the level of interest rates, exchange rates, commodity, equity or other price risks) move by ‘reasonably possible’ amounts. • The disclosures are required to be included in the financial statement and are subject to audit.

What these requirements mean for insurers • The conceptual disclosure requirements of AASB 7 and how to prepare for them will be a challenge for many entities. • In order to comply with AASB 7 new data sourcing solutions may be required. This may require new analysis tools or models, which could range from simple spreadsheets to complex risk management tools. Ensuring adequate internal control of these data gathering processes will be an additional challenge.

PricewaterhouseCoopers | 111 • The AASB 7 requirement to provide quantitative information on the sensitivity of profit and equity, and qualitative information on risk management ‘through the eyes of management’ will result in an unprecedented level of sensitive information being publicly available. It will certainly bring transparency to most companies’ risk management issues and companies need to ensure they are fully prepared and messages clearly explained. • Information is reported consistently, including when it’s for different purposes, such as financial statement and regulatory disclosures. In addition, AASB 101: Presentation of Financial Statements has also been amended to require entities to disclose objectives, policies and processes used for managing capital. The VALUE AIFRS General Insurance Australia (November 2005 update) publication produced by PricewaterhouseCoopers provides an illustrative example of the primary statements and key note disclosures for a general insurer under the revised AASB 1023, and other applicable AIFRS. The revised AASB 1023 incorporates extensive additional disclosures in respect of accounting policies, sensitivities to key assumptions, risk exposures and risk management. The additional disclosure requirements are summarised below.

Income statement The income statement should include: • The underwriting result (net premium less net claims and underwriting expenses). • Net claims incurred (showing gross undiscounted, reinsurance recoveries undiscounted, the effect of discounting and a split of risks borne in the current period and reassessment of old risks). • Any deficiency arising from LAT (showing write down of DAC, write down of intangibles and additional unexpired risk provision recognised).

Balance sheet Balance sheet disclosures should include: • Outstanding claims liability (quantifying central estimate and risk margin). • Risk margin (including the percentage applied, probability of adequacy it achieves and process used to determine it). • Process used for determining assets backing insurance liabilities. • Non-insurance contracts (nature of contracts and assets, liabilities, income, expense and cash flows arising from them). • Segmental information (per AASB 114 Segmental Reporting, geographical split based on location of the insured risks).

Insurance contracts – Explanation of recognised amounts Other disclosures include: • Accounting policies.

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• Assets, liabilities, income, expense and cash flows arising from insurance contracts. • Gains and losses recognised on buying reinsurance. • Key assumptions (quantification and process used to determine them). • Effect of changes in assumptions (including quantification of impact of each material assumption change). • Reconciliations of changes in insurance liabilities and related items.

Insurance contracts – Amount, timing and uncertainty of cash flows Other disclosures include: • Risk management objectives and policies for mitigating risk. • Description of insurance risk pre and post mitigation via reinsurance. • Sensitivity of profit and equity to changes in variables in respect of insurance risks. • Concentrations of insurance risk. • Claims development (showing development of claims estimates, goes back to date of loss of any material claim that still has uncertainty over amount and timing of cash flow, not greater than 10 years). • Terms and conditions of material insurance contracts. • Information in respect of interest rate risk and credit risk. • Exposures to interest rate risk or market risk under embedded derivatives.

Interaction with regulatory reporting Additionally, GPS 110 Capital Adequacy for General Insurers requires the following to be disclosed in respect of capital adequacy in the financial statements: a) The amount of eligible Tier 1 Capital, with separate disclosure of items specified in Attachment A to GPS 110 Measurement of Capital Base; b) The aggregate amount of any deductions from Tier 1 Capital; c) The amount of eligible Tier 2 Capital, with separate disclosure of items specified in Attachment A to GPS 110 d) The aggregate amount of any deductions from Tier 2 Capital; e) The total capital base of the insurer derived from the items (a) to (d) above; f) The minimum capital requirements (MCR) of the insurer; and g) The capital adequacy multiple of the insurer (item (e) divided by item (f)).

PricewaterhouseCoopers | 113 Life Insurance AASB 1038 Life Insurance Contracts prescribes the accounting treatment for life insurance contracts. It also mandates the use of certain options available in other accounting standards. The following figure highlights the key accounting standards for life insurers.

Figure 4.3 – Key AIFRS reporting standards for life insurers

Financial Reporting of Life Insurance Activities

AASB 7 (issued July 2004 Financial Revenue Financial and updated Investments e.g. AASB 138 Instruments September 2005) Intangible Assets Life Insurance & AASB 136 Contracts Impairment of Assets

Applies to all entities Enhanced disclosers on financial risks and now managed

Under AIFRS, the revised AASB 1038 applies to life insurance contracts (and reinsurance contracts), certain aspects of accounting for life investment contracts and to certain assets backing life insurance liabilities or life investment contract liabilities. The accounting requirements for all other assets, liabilities, revenues and expenses of a life insurance company are set out within other standards. The elements of life investment contracts which are not set out in AASB 1038 are prescribed in the standards AASB 118 and AASB 139.

Insurance contract An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

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Life investment contract A life investment contract means a contract which is regulated under the Life Act but which does not meet the above definition of a life insurance contract in the revised AASB 1038 and similar contracts issued by entities operating outside Australia. Friendly societies that issue life insurance contracts are required to comply with AASB 1038. AASB 1038 addresses key accounting issues by requiring: • profits to be recognised appropriately over the life of an insurance contract in line with the services provided; • calculation of best estimate policy liabilities; and • application of fair value principles.

Table 4.1 – Key principles – Life insurance contracts

Principle Requirement Basis for valuing policy liabilities Policy liabilities are calculated as the present value of the best estimate of expected future net cash flows, plus future profit margins Basis for valuing investments backing life Investments are valued at fair value through profit or loss insurance contract liabilities where permitted Basis for valuing controlled entities Controlled entities are no longer valued at net market value; however, in accordance with AASB 127 Consolidated and Separate Financial Statements, there is a choice of accounting at cost or fair value Deferral of acquisition costs Deferred and amortised over the period of expected benefit. DACs are to be deducted from policy liabilities Recognition of embedded value Not recognised

Table 4.2 – Key principles – Life investment contracts

Principle Requirement Basis for valuing policy liabilities Valued at fair value in accordance with AASB 139. In practice, this will likely be on an accumulation basis, but may be adjusted to take account of demand deposit features Basis for valuing investments backing Investments are valued at fair value through profit or loss where life investment contract liabilities permitted Deferral of acquisition costs Only those costs which are incremental and directly attributable to securing the life investment contract can be deferred. This will be recognised as a separate asset and will be tested for impairment at each balance date Recognition of embedded value Not recognised

Profit recognition – Life insurance contracts Planned profit margins and life insurance contract (referred to as policy liabilities) are calculated separately for each related product group using best estimate assumptions at each reporting date. Profit margins are released over the financial year during which services are provided and revenues relating to those services are received. The balance of the planned profits is deferred

PricewaterhouseCoopers | 115 by including the amount in the value of policy liabilities. The revised AASB 1038 requires the use of the prospective method (projection basis) to value policy liabilities (including planned profit margins and other components) at each reporting date unless, using the retrospective method (accumulation basis), the results are not materially different. To ensure planned margins are recognised during the financial year in which the relevant services are provided, policy liabilities include a component relating to those margins. This methodology, which is commonly known as the “margin-on-services” method, results in reported shareholders’ profits comprising: • The release of planned profit margins on policies in force at the beginning of the year; • The release of planned profit margins on new business written during the year; • The impact of differences in assumed and actual experience during the year including mortality, disability, expenses, lapses, inflation, taxation, reinsurance and investment returns; • Loss recognition (or reversal of past recognised losses) as appropriate; and • Investment earnings on shareholders’ capital and retained profits. Changes in the assumptions underlying the policy liabilities are spread over future years during which the services to policyholders are rendered, except those for groups of related products on which future losses are expected. The effect of a change to assumed discount rates caused by changes in investment market conditions or where calculation errors occur results in a revenue or expense being recognised in the current financial year. The income statement includes all premium and policy-related revenue, investment revenue, fair value gains and losses, all claims (including surrenders), and all expenses and taxes, whether they relate to policyholders or shareholders. The change in the value of policy liabilities (including the change of unvested policyholder benefits and discretionary additions/bonuses vested in policyholders during the financial year) is shown as an expense before arriving at the shareholder profit.

Valuation of life insurance policy liabilities Under the best estimate method, the liability is calculated as the present value of expected future benefit payments, plus expenses, less future receipts. The following factors are considered to be material to the calculations: • Investment earnings; • Inflation; • Taxation; • Expenses; • Mortality and morbidity reinsurance; and • Policy discontinuance.

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The best estimate liability will normally be determined using projection methods, and the value of future profits calculated as the present value of future profit margins. A profit margin is determined using a profit carrier, which is a financially measurable indicator of either the expected cost of the services provided to the policyholder or the expected income relating to the services. Profit carriers are selected and profit margins determined at policy commencement to enable an appropriate emergence of profit over the term of the benefits or services provided. The selection of a profit carrier is critical in determining the timing of profits released. More than one profit carrier may be selected for a product, although the practical implications of selecting multiple carriers should be considered relative to the materiality of the results. Typical profit carriers are identified in the following table.

Table 4.3 – Profit carriers for life insurance contracts

Product Profit carrier Yearly renewable term Premiums or claims Level premium term Claims Group life Premiums or claims Disability income Claims Immediate annuities Annuity payments Traditional non-participating Death claims Traditional participating Value of bonuses

Profits or losses may emerge on acquisition depending on whether establishment fees are more or less than the related expenses. Losses may also emerge if expected future income is not considered adequate to cover acquisition expenses. Changes in assumptions which directly affect profit in the year in which they occur are: • Changes in the investment earning rate due to a change in market conditions; and • Changes that lead to capitalised losses or reversal of previous capitalised losses. All other changes in best estimate assumptions result in the profit margin being recalculated. This results in future profits calculated using the revised best estimate assumptions re-spread in accordance with the profit carrier. When expected future losses are identified at a reporting date, these are recognised as an immediate loss at that date. A record of cumulative losses is kept for each related product group and profit margins are maintained at zero until cumulative losses are fully reversed.

Revenue recognition – Life investment contracts Revenue from investment contracts arises either from explicit fees charged to investment contract holders or from the earning of the management services elements (MSE) inherent in the valuation of the investment contract liability. Explicit fees are measured as the fair value of the consideration received or receivable and are earned in the income statement as the services are provided to the contract holder. This would

PricewaterhouseCoopers | 117 normally be on a straight line basis over the life of the investment contract but other earning patterns may be more appropriate if they better reflect the provision of services. A MSE arises when the sum of consideration received or receivable exceeds the fair value of the investment contract liability upon initial recognition. This deferred revenue is recognised as a liability on the balance sheet and earned as the management services are provided, as per the explicit fees above. Incremental costs that are directly attributable to the acquisition of an investment contract are recognised as an asset if: they can be identified separately; measured reliably; and if it is probable that they will be recovered. An incremental cost is one that would not have been incurred if the life insurer had not acquired the life investment contract. The asset represents the insurer’s contractual right to benefit from providing ongoing services, and is amortised as the insurer recognises the related revenue.

Valuation of investment contract liabilities Investment contract liabilities are valued at fair value in accordance with AASB 139. As there is generally no active market for investment contract liabilities, these should be valued using an appropriate valuation technique which would normally involve a discounted future cash flow analysis. For investment contracts with a demand feature, or surrender value, AASB 139 stipulates that the fair value of the liability cannot be less than the current surrender value.

Accounting for investments AASB 1038 requires life insurers to measure all assets backing life insurance and life investment contracts at fair value through profit or loss as at the reporting date where this option is available. Changes in the fair value must be recognised in the income statement as either income or expenses in the financial year in which the changes occur. Where there are choices available in other standards for the measurement of assets, AASB 1038 requires the following to be applied, to those assets determined as backing life insurance and life investment contracts.

Table 4.4 – Measurement basis of assets backing life insurance and life investment contracts

Type of asset Measurement basis Financial assets Fair value in accordance with AASB 139 (Fair value through profit or loss – see the Developments section earlier in this chapter) Investment property Fair value using the fair value model under AASB 140 Investment Property (Fair value gains and losses through profit or loss) Property, plant and equipment Revaluation model under AASB 116 Property, (including owner-occupied property) Plant and Equipment, being fair value less any subsequent accumulated depreciation and subsequent accumulated impairment losses (revaluation movements through equity)

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Consolidation AASB 1038 requires the full consolidation of statutory funds and all controlled entities. It recognises that the interests of policyholders and shareholders are intertwined and form the basis of a single entity. Where the parent entity controls the life insurance subsidiary, the parent in turn controls the assets and liabilities of the statutory funds and the policyholders’ interests. Benefit funds of friendly societies are also consolidated in the same form as the consolidation of a life insurance company statutory fund.

Acquired life insurance contracts When purchasing a life insurance company or a portfolio of life insurance contracts, a life insurer must value the insurance assets and insurance liabilities assumed at fair value. They are also then permitted, but not required, to split the fair value into two components: • A liability measured in accordance with the insurer’s accounting policies for life insurance contracts; and • An intangible asset, representing the difference between the fair value of the insurance contracts acquired and the liability noted above. The intangible asset is exempt from the recognition and measurement requirements of both AASB 138 Intangible Assets and AASB 136 Impairment of Assets. It is not exempt from the disclosure requirements. The subsequent measurement has to be consistent with the measurement of the related liability, i.e. it will be amortised over the life of the liabilities, consistent with the profit recognition on those contracts.

Disclosure requirements AASB 1038 requires specific life insurance contract disclosures. The key requirements are summarised below, but this list is not exhaustive. For full details of the disclosure requirements of AASB 1038, see the PricewaterhouseCoopers publication “VALUE AIFRS Life Insurance Australia – Annual financial reporting 2005” (November 2005 update).

Explanation of recognised amounts – life insurance contracts A life insurance company is required to disclose “information that identifies and explains the amounts in its financial report arising from life insurance contracts”, including: • Accounting policies for life insurance contracts and related assets, liabilities income and expenses; • Assets, liabilities income, expense and cash flows arising from life insurance contracts (AASB 1038 paragraph 14.1.6 list the components of life insurance liabilities which are expected to be disclosed); • The process used to determine the assumptions that have the greatest effect on life insurance balances, including, where practicable, quantified disclosure of those assumptions (AASB 1038 paragraph 14.1.5 list the assumptions which are expected to have the greatest effect);

PricewaterhouseCoopers | 119 • The effect of changes in assumptions used to measure life insurance assets and life insurance liabilities, showing separately the effect of each change that has a material effect on the financial report; and • Reconciliations of changes in life insurance liabilities and reinsurance assets. The following split of expenses must be disclosed by life insurers: • Outwards reinsurance expense; • Operating expenses: − Claims expense; − Policy acquisition expenses, separated into material components including commission; − Policy maintenance expenses; and − Investment management expenses; and • The basis for the apportionment of operating expenses between: − Life insurance contract acquisition; − Life insurance contract maintenance; − Investment management expenses; − Life investment contract acquisition; − Life investment contract maintenance; and − Other expenses.

Amount, timing and uncertainty of cash flows – life insurance contracts To meet the requirements, the following disclosures should be made in respect of life insurance contracts: • Objectives in managing risk and policies for mitigating risk; • Contract terms and conditions which have a material effect on the amount, timing and uncertainty of cash flows; • Information about insurance risk (before and after risk mitigation by reinsurance), including: − The sensitivity of profit and equity to changes in variables (for material effects); − Insurance risk concentration; − Interest rate risk and credit risk disclosures, detailing: - Exposure to interest rate risk by class of asset and liability, including details of contractual repricing or maturity dates and effective interest rates, where applicable; and - Exposure to credit risk for each class of financial asset or other credit exposure, including the maximum credit risk exposure and significant concentrations of insurance risk.

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Assets backing life insurance or life investment contract liabilities Life insurers should disclose the process they have adopted to determine which assets back their life insurance or life investment contract liabilities.

Health insurance Australian RHBOs are required to prepare financial statements that comply with AIFRS. AASB 1023 applies to all contracts of insurance issued by RHBOs. The key principles and disclosure requirements of the revised AASB 1023 are set out in this section under General Insurance. This section sets out specific matters relevant to the application of the revised AASB 1023 by RHBOs. In order to ensure a consistent approach to interpreting the revised AASB 1023, the Australian Health Insurance Association (AHIA) has developed guidance notes to assist RHBOs in applying the revised AASB 1023. The key issues addressed by the guidance notes include the following:

Assessment of insurance risk The revised AASB 1023 applies to “general insurance contracts” defined as a contract under which one party (the insurer) accepts significant insurance risk from another party. RHBOs will need to assess the extent of risk transfer in new products launched. RHBOs may issue contracts that do not transfer “significant insurance risk” within the meaning of the revised AASB 1023. For example, the benefits under certain products may be restricted to the extent that claims payments are not variable enough for the RHBO to have demonstrated the transfer of significant risk. If no significant insurance risk is transferred, AASB 1023 will not apply and RHBOs would instead apply AASB 139 to the contract to the extent that the contract gives rise to financial assets or financial liabilities. To the extent that the contract is a service contract it should be treated under AASB 118.

Premium revenue Under the revised AASB 1023, premium revenue is recognised from the date on which the insurer accepts insurance risk (“attachment date”) over the period of the contract in accordance with the pattern of the incidence of risk expected. Unlike most other forms of insurance contract, a health insurance contract does not typically stipulate a fixed period of cover as contracts typically require payment in advance and include an option for the policyholder to renew. In practice, RHBOs recognise premiums from the date cash is received over the period covered by the payment. It should be noted that under the AASB 1023, RHBOs are legally obliged to continue cover for 63 days if a policyholder’s premiums are in arrears. RHBOs will therefore need to consider past experience to determine whether it is appropriate to accrue for premiums in arrears.

PricewaterhouseCoopers | 121 It should be noted that with regard to the LAT required by the revised AASB 1023 the unearned element of premiums in arrears and the expected claims relating to that business should be considered.

Measurement of outstanding claims The requirements of the revised AASB 1023 are set out in the General Insurance section. Matters of particular importance to RHBOs are set out below.

Central estimates A central estimate of claims incurred is the mean of all possible values of outstanding claims liabilities as at the reporting date. The central estimate, therefore, has a 50 per cent probability of adequacy (i.e. there is a 50 per cent chance that the central estimate will be adequate to meet all future claims payments).

Risk margin The revised AASB 1023 requires that the outstanding claims liability includes a risk margin to reflect the inherent uncertainty in the central estimate of the present value of the expected future payments. It does not specifically prescribe a fixed risk margin or probability of adequacy. RHBOs need to determine the level of risk margin that may have been implicitly held at the date of transition to AIFRS.

Regulatory valuations The solvency requirements for RHBOs are set by PHIAC and are set out in schedule 2 of PHI (Health Benefits Fund Administrations Rules 2007). Under this standard the starting point for valuing liabilities is the value shown in the financial statements. This valuation is then adjusted for “solvency risks” being the risks relating to assumptions used valuing liabilities.

Discounting The revised AASB 1023 requires the liability for outstanding claims to be discounted to reflect the time value of money. As health insurance claims are generally settled within one year, RHBOs may be able to demonstrate that no discounting of claims is required as the difference between the future and present value of claims payments is not material.

Deferred acquisition costs When acquisition costs meet certain criteria they must be deferred, recognised as assets and amortised systematically. This may represent a significant change for RHBOs which may previously have expensed these costs as incurred. RHBOs will need to establish procedures to identify relevant costs to be deferred. Due to the maturity of the Australian health insurance market and the tendency for customers not to switch between funds, the costs to be deferred may not be material. RHBOs will, however, need to put procedures in place to gather sufficient data to make this assessment.

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Unearned premium and the liability adequacy test

Unearned premium Typically RHBOs have referred to the unearned premium liability as “contributions in advance”. These are determined in accordance with AASB 1023.

Liability adequacy test The revised AASB 1023 requires a LAT to be performed by the RHBO at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio. The AHIA guidance note suggests that RHBOs should dissect portfolios into at least two classes of business: hospital and ancillary. A RHBO may determine further disaggregation of portfolios depending on its particular portfolio of products. For consolidated financial statements, where the consolidated entity includes two or more RHBOs, the LAT should be performed at the consolidated level.

Authorised representatives and insurance brokers There may be a number of accounting considerations for authorised representatives and insurance brokers from the general application of AIFRS, depending upon the instruments and contractual arrangements brokers have in place. Commission revenue is recognised on the effective commencement or renewal dates of the policies only when additional services are not required to be rendered by the authorised representative or insurance broker. Where it is probable that additional services will be required to be rendered the commission is deferred and recognised over the period services are provided. Under AASB 132 Financial Instruments: Presentation and AASB 139, premium receivables, premium payables and premium cash collected continue to be recognised on-balance sheet, except where the terms of the contractual arrangement indicate otherwise.

PricewaterhouseCoopers | 123 4.4 Annual accounts In general, a public company must file its annual shareholder accounts with ASIC within four months of year-end. Small proprietary companies are generally not required to lodge the shareholder accounts with ASIC. The shareholders’ accounts prepared under the Corporations Act must be independently audited by an Australian registered auditor.

General insurance The Financial Sector (Collection of Data) Act 2001 made APRA the single government collection agency for financial sector data. Therefore, all of APRA’s industry supervision acts, including the Insurance Act, were amended to remove their data collection provisions. The annual statutory accounts, which must be audited, are required to be prepared on a different basis from the financial statements which must comply with the Corporations Act and Australian accounting standards. The key differences are outlined in the following table:

Table 4.5 – Key differences in treatment between financial and prudential reporting

Item AASB 1023 treatment APRA treatment Adjustment required Premiums (including Earned over the life of Recognised as income at Write back movement in unclosed business) the policy based on the policy attachment date unearned premiums pattern of risk and LAT, providing for premium deficiency Acquisition costs Costs are deferred and Recognised on an Write back movement (including fire brigade amortised over the as-incurred basis in DAC charges) period of benefit (i.e. premium earning) Reinsurance expense Recognised on a basis Recognised as an Write back movement in consistent with the expense at policy deferred reinsurance pattern of reinsurance attachment date Claims Includes estimating Includes estimating Increase liability for expected claims (IBNR) expected claims on outstanding claims on earned premiums written premiums by expected losses on unexpired period of policies (premium liabilities). Adjust for differences in assumptions on discount rate and level of risk margins Recoveries (reinsurance Includes estimating Includes estimating Increase asset for and other) expected recoveries expected recoveries expected recoveries on outstanding claims on outstanding claims consistent with change and premium liabilities in liability for outstanding claims and premium liabilities Tax Liability method Liability method The adjustments above must be tax effected

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APRA prudential standards stipulate that for prudential reporting purposes, an insurer must: • discount insurance liabilities using Commonwealth Government bond rates; and • include a risk margin so as to achieve 75 per cent probable adequacy of insurance liabilities and not less than half the coefficient of variation. For some insurers, this may result in differing treatments for prudential and financial reporting purposes. In this case, the standards indicate that disclosure of the differing treatments should be included in the published financial statements. The two accounting frameworks are reconciled within the audited APRA yearly statutory accounts forms. The yearly statutory accounts forms and their instructions can be found on the APRA website (www.apra.gov.au). An insurer that holds an Australian Financial Services Licence (AFSL) under the Financial Services Reform Act 2001 (the FSR Act) also needs to comply with the reporting requirements for licensees (see “Authorised representatives and insurance brokers” below).

Life insurance Life insurers and friendly societies are required to produce general purpose financial statements in accordance with the revised AASB 1038. Lfe insurers also need to comply with the reporting requirements for AFSL licensees (see “authorised representatives and insurance brokers” below). Annual regulatory requirements as previously required by the Life Act have been altered as a result of the SRR Act. As such the PR 35 Financial Statements have been replaced by the series of forms outlined in section 4.1.

Authorised representatives and insurance brokers As AFSL holders, authorised representatives and insurance brokers are required to lodge forms FS 70 (profit and loss statement and balance sheet) and FS 71 (audit report). These forms must be lodged within: • three months of financial year-end for bodies corporate which are disclosing entities; • four months of financial year-end for bodies corporate which are not disclosing entities; or • two months of financial year-end if the licensee is not a body corporate. It is possible to apply to ASIC under Section 989 D(3) for an extension of time for lodging the forms. For AFSL holders which are not regulated by APRA, the auditor will need to review measures for ensuring compliance with all of the financial requirements set out in the licence conditions, which are more extensive than under the old regime and include: • Ability to pay all debts as and when they become due and payable;

PricewaterhouseCoopers | 125 • That total assets exceed total liabilities at all times; • Sufficient cash resources to meet three months’ expenses plus adequate cover for contingencies, based on rolling three-month cash flow projections that meet ASIC’s requirements; • Requirement to hold $50,000 of surplus liquid funds for licensees that hold more than $100,000 of client funds; and • Tiered requirement to hold $50,000 to $10 million of adjusted surplus liquid funds for licensees that have more than $100,000 of liabilities from transacting with clients as a principal. Furthermore, the management of all licensees will have to demonstrate to the auditor their procedures for ensuring compliance with Part 7.8 of the Corporations Act. Not only does this include requirements similar to the old regime concerning trust accounts, financial records and financial statements, but it also includes procedures relating to: • Preventing unconscionable conduct; • Complying with “anti-hawking” or cold-calling restrictions in relation to financial products; and • Adequate staff training and identification of breaches. In addition, Section 990(K) contains “whistle-blowing” provisions that obligate auditors to report to ASIC within seven days if they become aware of a situation that may adversely affect the ability of the licensee to meet its obligations and may result in a breach of either: • the conditions of the licence; or • the requirements pertaining to trust accounts, financial records or financial statements.

Health insurance Audited annual Corporations Act financial statements must be lodged in line with the requirements of the Corporations Act, i.e. within three months for a disclosing entity and four months for a non-disclosing entity.

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4.5 Other returns

General insurance Under stage 2, in addition to the compliance declarations and statements described above, the general insurer must also provide APRA with: • A set of annual statutory accounts; • A financial information declaration (FID); • The approved auditor’s opinion on the annual statutory accounts; • The approved actuary’s ILVR; • The approved actuary’s financial condition report (FCR); and • Quarterly statistical and financial returns. The general insurer must also arrange for an independent peer review of the approved actuary’s ILVR.

Financial information declaration One of the new requirements of stage 2 is that a general insurer must provide to APRA a FID stating that: • The financial information lodged with APRA has been prepared in accordance with the Insurance Act, regulations, prudential standards, the Collection of Data Act 2001, accounting standards and other mandatory professional reporting requirements in Australia, to the extent that the accounting standards and professional reporting requirements do not contain any requirements contrary to the aforementioned legislative and prudential requirements; • The information provided to the approved auditor and approved actuary for the purpose of enabling them to undertake their roles and responsibilities is accurate and complete, consistent with the accounting records of the insurer, and a true representation of the transactions for the year and the financial position of the insurer; and • The financial information lodged with APRA is accurate and complete, consistent with the accounting records, and represents a true and fair view of the transactions for the year and the financial position. This declaration is to be signed by the chief executive officer (CEO) and the chief financial officer (CFO), or local equivalents for a branch operation, and is due within four months of the financial year-end. Any qualifications must include a description of the cause and circumstances of the qualification, and the steps taken, or proposed to be taken, to remedy the problem.

PricewaterhouseCoopers | 127 Approved auditor’s opinion The approved auditor must prepare a certificate, addressed to the board of the general insurer, in respect of the insurer’s yearly statutory accounts. The certificate must specify whether, in the approved auditor’s opinion, the yearly statutory accounts of the general insurer present a true and fair view of the results of the operations for the year and financial position at year-end, in accordance with: • The provisions of the Insurance Act and prudential standards, the Collection of Data Act and reporting standards; and • To the extent that they do not contain any requirements that conflict with the aforementioned, Australian accounting standards and other mandatory professional reporting requirements in Australia. In preparing the certificate, the approved auditor must have regard to relevant professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB), to the extent that they are not inconsistent with the requirements of this prudential standard.

Approved actuary’s insurance liability valuation report From 1 October 2006, general insurers are required to comply with GPS 310. This standard replaces GPS 210 and specifies the contents and the requirements of the ILVR. These contents and requirements remain largely unchanged and are as follows: • This report must be addressed to the board of the insurer and provide the approved actuary’s advice in respect of the value of the insurer’s insurance liabilities, determined in accordance with GPS 310; • This report must, in respect of each class of business underwritten by the insurer (or in abbreviated details for classes that are immaterial), provide:

− The value of the insurance liabilities; − The assumptions used in the valuation process and the justifications of these assumptions; − The availability and appropriateness of the data; − Significant aspects of recent experience; − The methodologies used to model the central estimates of outstanding claims liabilities and premium liabilities; − An indication of the uncertainty in the central estimate, including statistics such as the standard deviation; − The results of the sensitivity analyses undertaken; − A description of the probability distributions and parameters, or approaches adopted to estimate uncertainty; − Risk margins that relate to the inherent uncertainty in the central estimate values for outstanding claims liabilities and premium liabilities.

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• The report must provide sufficient information in relation to the assumptions and methods used for the valuation liabilities so that another actuary reading the report can obtain a sound understanding of the valuation process and results, limitations and key risks in the insurance portfolio; and • This report must be prepared by the approved actuary and be subject to an independent peer review. When an insurer does not adopt the value of the insurance liabilities recommended by the approved actuary, the insurer must notify APRA in writing, and should include within its published annual financial statements: • The reasons for not accepting the approved actuary’s advice, or for not determining the insurance liabilities in a manner consistent with GPS 310; and • Details of the alternative assumptions and methodologies used for determining the value of the insurance liabilities.

Approved actuary’s financial condition report Under the new GPS 310, the approved actuary must prepare an annual FCR. This report must be filed with APRA at the same time or before lodgement of the yearly statutory accounts. The FCR must be addressed to be the Board of the insurer and provide the approved actuary’s objective assessment of the overall financial condition of the insurer. APRA requires that in preparing an FCR, an approved actuary must have regard to relevant professional standards issued by the IAA, to the extent that they are not inconsistent with the requirements of GPS 310. The relevant professional standard for this purpose is General Insurance Standard 305 Financial Condition Reports for General Insurance released in March 2006. This professional standard took effect on June 2006. In accordance with GPS 310 and professional standard 305, the FCR must include or show consideration for the following: • Statements by the approved actuary, setting out who commissioned the actuarial reporting, the scope and purpose of the FCR, the specified terms of reference and any limitations or restrictions placed upon the actuary; • Information requirements, including identification of the information upon which the approved actuary placed material reliance in preparing the FCR, the limitations of the FCR as a result of material data discrepancies, and any other data reliances and limitations; • Business overview; • Assessment of the insurer’s recent experience and profitability, including at least the experience during the year ending on the valuation date; • Summary of the key results of the ILVR (prepared in accordance with GPS 310); • Assessment of the adequacy of past estimates for insurance liabilities (may include references to the current or past ILVRs);

PricewaterhouseCoopers | 129 • Assessment of the asset and liability management, including the insurer’s investment strategy; • Assessment of pricing, including adequacy of premiums; • Assessment of the suitability and adequacy of reinsurance arrangements; • Assessment of the suitability and adequacy of the risk management framework; and • Assessment of capital management and capital adequacy. The approved actuary is required to consider the future implications and outlooks of the above matters. If the implications are adverse, the approved actuary must propose recommendations to address the issues. As a general rule, an FCR must be completed in respect of each insurer. An insurance group may submit to APRA an FCR in respect of the insurance group where the approved actuary completing the FCR is the approved actuary for each insurer included in the FCR or it is practical to produce a single over-arching FCR. If the single FCR does not adequately address each of the above issues for any single insurer, APRA may require one or more insurers in the group to prepare and submit to APRA a new FCR. Foreign insurers must prepare an FCR in respect of their Australian branch operation.

Independent peer review Under GPS 310, the general insurer must arrange for an independent peer review of the approved actuary’s ILVR. This peer review must provide an assessment of the reasonableness of the approved actuary’s investigations and reports including the results contained within. Copies of the report must be provided to the approved actuary, the approved auditor, the board and the management of the insurer before the yearly lodgement of statutory accounts. The review report is not required to be provided to APRA, but must be made available to APRA upon request. In March 2006, the IAA released Professional Standard 100 External Peer Review for General Insurance and Life Insurance, which details the responsibilities of the reviewing actuary and the reviewing requirements. Items to be reviewed by the external peer reviewer include: • Scope – Consideration of the appropriateness of the scope of the primary actuary’s specified valuation and of the actuarial advice provided in relation to it; • Data – Consideration of the sources of data, whether appropriate and sufficient data inputs have been used, and that the quality of these have been checked by the primary actuary or the personnel employed to support the primary actuary; • Valuation methods – Consideration as to whether the methods chosen are suitable in the circumstances and within the range of reasonable current practice, and whether their application has been appropriate; • Assumptions – Consideration as to whether assumptions are consistent with experience investigations, industry trends and reasonable judgement;

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• Controls – Consideration as to whether appropriate quality assurance reviews and controls are in place; • Analysis of specified valuation results – Consideration as to whether results have been developed following a reasonable sequence of steps; that there is consistency within the results; and that changes in the results from one year to the next have been adequately explained; • Specified valuation results – Consideration as to whether results have been clearly stated, that they are supported by the experience and any reasonableness tests undertaken have been identified in the primary actuary’s report. Consideration must also be given as to whether the reliances and limitations of the primary actuary have been clearly stated; and • Standards – The reviewing actuary must consider whether the work complies with applicable legislation, including regulations and subordinate legislation, relevant professional standards and takes regard of guidance notes with appropriate disclosures.

National Claims and Policies Database The National Claims and Policies Database requires insurers to submit claims and policies at three different levels of aggregation and analysis. Classes covered by this database include public and product liability and professional indemnity. This database, managed by APRA, supplements databases on CTP and workers compensation in several states and aims to provide transparency in the industry. The data may also reduce the volatility through the insurance cycle, as insurers will have access to more information to assess the risks more precisely.

Life insurance Life insurers and friendly societies are required to lodge the following during the year in addition to annual APRA forms (see section 4.4): • Quarterly APRA forms (forms 100.0 – 340.0) within 20 business days of quarter-end • An annual Financial Condition Report (FCR) within 3 months of year-end • A Reinsurance Report within 3 months of year-end • A Risk Management Declaration with or before the lodgement of the annual returns

Risk Management Declaration Under LPS 220, the Board must provide APRA with a declaration on risk management (Risk Management Declaration), relating to each financial year of the life company. This declaration must state that appropriate enquiries have been made that the systems and processes in place are in compliance with regulations and standards, and that there are system and processes in place for managing and monitoring risks The Risk Management Declaration must be submitted to APRA on, or before, the day that the life company’s annual financial statements are required to be submitted to APRA.

PricewaterhouseCoopers | 131 If the Board qualifies the Risk Management Declaration, the qualified Risk Management Declaration must include a description of any material deviation from the life company’s risk management obligations, and the steps taken, or proposed to be taken, to remedy those breaches.

Health insurance All health insurance funds must provide a number of other returns under various legislative requirements. These include: • PHIAC 1 Returns – Quarterly state and territory-based returns must be prepared for all states under the PHI Act 2007. Previously, reporting was only required if the health benefits fund has more than 500 Single Equivalent Units in each state or territory. These must be prepared in accordance with the guidelines established in PHIAC circulars. Each quarterly return is audited by the fund’s external auditor at the end of the financial year; • PHIAC 2 Returns – This is the main reporting requirement under the solvency and capital adequacy standards. Quarterly returns are lodged with PHIAC and the annual return is audited by the fund’s external auditor. The annual return includes an unaudited certification by directors regarding risk management; • PHIAC 3 Returns – These quarterly returns contain prostheses reports and are not required to be audited; • PHIAC 4 Returns – Specialty gap cover data is required to be provided quarterly to PHIAC. The totals reported on this quarterly PHIAC 4 medical gap report should be consistent with data reported in the quarterly PHIAC 1 return. These are not required to be audited; • Rebate Returns – Health benefits funds are required to lodge a monthly application for the rebate with Medicare Australia in line with the requirements of section 26-10 of the PHI Act 2007 in order to receive the rebate. • Second Tier Benefits Returns – The Department of Health and Ageing issued circular 40/07 in July 2007, which outlined the amended requirements under schedule 5 to the PHI (Benefits Requirements) Rules 2008 (No 1). Under these requirements, if a health facility is accredited with a Commonwealth provider number and it does not have Hospital Purchaser Provider Agreements (HPPA) or a similar agreement with a particular health fund, it may approach the fund for its second tier benefits rates. The health benefits funds are required to calculate 85 per cent of the average HPPA rates, effective at 1 August, for procedures that are included in the majority of their HPPAs. The audit report must be lodged with both the Department of Health and Ageing and PHIAC by 30 September each year; and

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4.6 Key dates

General insurance

Financial Sector (Collection of Data) Act Lodgement of returns • Quarterly forms (GRF 110.0 – 310.3*) Within 20 business days of the end of each quarter. *These forms may be subject to review as part of the work performed by the approved auditor under AGS 1064 Audit Implications of Prudential Reporting Requirements for General Insurers.

• Annual forms and report (GRF 110.0 – 450.0), [only GRF 110.0 – 320.0 are audited] including directors’ certification in respect of the Risk Management Strategy (RMS) or Reinsurance Management Strategy (REMS), FID, approved actuary’s ILVR and FCR, approved auditor’s certificate on the yearly statutory accounts and APRA prudential compliance review report Within four months of the year-end. • Business plan Annually (when approved by the board) and when material changes are made. • Changes in reinsurance and risk management strategies Within 10 days of board approval. The revised REMS must be approved by APRA. • Changes to details in original application for licence, including appointment of senior staff, approved actuary and approved auditor Must be approved by APRA prior to the change taking effect. • National Claims and Policies Database data (GRF 800.1 – 800.3 and LOLRF 800.1– 800.3) Within two months from the end of the half year (30 June and 31 December).

Workers compensation legislation Annual returns • New South Wales (Form 4) [audited] Within six weeks of balance date. • New South Wales Dust Diseases Return (and adjustment sheet) Within six weeks of balance date. • Northern Territory (Forms A, B) [audited] Registered with and approved by Work Health Authority. Renew approval each year, no later than 42 days before expiry of last approval. • Tasmania (Form C) [unaudited], (Form D) [audited] Due by 31 July each year.

PricewaterhouseCoopers | 133 Quarterly returns • New South Wales (Forms 1.1 – 1.3, 2.2 – 2.3, 5.1 – 5.2) [audited annually] Within four weeks of 30 September, 31 December, 31 March and 30 June.

Monthly returns • New South Wales (Forms 2.1, 3, 6.1 – 6.3, 7.1 – 7.4) [audited annually] Within four weeks of the end of each month. • Tasmania (Forms A, B) Within 28 days of the end of each month. • Western Australia (Forms 16, 17) Within 14 days of the end of each month.

Other contributions or levies payable • New South Wales WorkCover Authority Within 15 days of each month end. • New South Wales Dust Diseases levy Two instalments, 31 March, 30 November. • Western Australia Workers Compensation and Rehabilitation General Fund levy Due by 1 October each year or in quarterly installments in October, January, April and June each year. Minimum contribution self-insurers: $25,000; insurance companies: $100,000, refer to individual notification.

Compulsory third-party legislation Motor Accidents Act 1988 – New South Wales lodgement of returns • Copies of all returns filed with APRA, including audited financial statements Within two business days of filing. • Copies of all correspondence received from or dispatched to APRA Within two business days of receipt or despatch. • Existence of and details regarding any securities or encumbrance over assets Immediately following notification.

CTP insurers’ returns – New South Wales • Nominal Defendant Scheme Claims − Report of recoveries by insurers Half-yearly (31 January and 31 July). − Notification of finalisation of Nominal Defendant Scheme Claims

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When information is available. • Detailed CTP premium income returns for deregulated premiums Quarterly (21 days after quarter end). • Statistics for Motor Accidents Authority (MAA) Claims Register − Claims data Monthly tape transfers (seven days after month end). − Payments data, including estimates Quarterly tape transfers (15 days after quarter end). • CTP premium filing and such additional information (including actuarial reports) as the MAA may reasonably require Whenever the company proposes to alter premiums and, in any event, at least once a year. • APRA returns and correspondence Within two days of receipt or despatch, as applicable. • Levies and charges – New South Wales − Bulk billing lump sum for hospital and ambulance payments Quarterly. • Levy on deregulated premium collections Monthly (14 days after month end) and audited annually.

Financial Services Reform Act Annual returns • Financial statements and FSR Act compliance audited opinion Within three months of balance date (or two months if the licensee is not a body corporate).

Life insurance Annual returns • LRF 100.0 – LRF 430.0 Within four months of balance date; forms must be audited [note at the time of printing audit requirements are still being finalised] • FCR (LPS 310 Audit and Actuarial Requirements) Within three months of balance date. It should be noted that under LPS 310, a life insurer may elect to prepare a FCR at any other balance date. A copy of such a report must be provided to APRA within three months of the relevant balance date • Reinsurance Report (LPS 230 Reinsurance) Within three months of balance date. • Risk management declaration (LPS 220 Risk Management) On or before the day that the life company’s annual regulatory financial statements are required to be submitted to APRA.

PricewaterhouseCoopers | 135 Quarterly returns • Quarterly reports required under LRS 100 – 340 Required quarterly as unaudited forms within 20 business days after the end of the reporting period; extended to 30 business days for the first 2 quarters of 2008 Other returns • Appointment or termination of actuary Within 14 days of appointment or termination.

Financial Services Reform Act Annual returns • Financial statements and FSR Act compliance audited opinion Within three months of balance date for a body corporate that is a disclosing entity and/or a responsible entity of a registered scheme (RE), within four months for a body corporate that is not a disclosing entity and/or RE and within two months if the licensee is not a body corporate.

Health insurance

Private Health Insurance Administration Council Lodgement of returns • Unaudited quarterly PHIAC 1* and 2 returns Within four weeks of the end of each quarter. • Annual audited quarterly PHIAC 1* returns All four quarters returns by 30 September each year. • Annual audited PHIAC 2 returns and certificate of risk management systems By 30 September each year. • Quarterly unaudited PHIAC 3 prostheses reports From March 2006 quarter, within 28 days of the quarter end. • Quarterly unaudited PHIAC 4 medical gap reports From December 2005 quarter, within 28 days of the quarter end. • Annual audited financial statements of health fund By 30 September each year. • Annual audited financial statements of the legal entity of which the health fund is part, if these are available to members By 30 September each year.

− * A PHIAC 1 return is to be completed for each state in which a fund has 500 single equivalent members.

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Risk Equalisation Trust Fund • Letters advising of the distributions to/from the fund are sent out quarterly following the processing of PHIAC 1 returns Approximately eight weeks from each quarter end.

Annual levy • Annual levy is based on fund membership numbers Payment is due quarterly, within two weeks of the request for payment.

Medicare Australia Lodgement of returns • Annual statement of 30% rebate receipts [audited] Within four weeks from the end of the year.

Federal Department of Health and Ageing Lodgement of returns • Audited Second-Tier Benefits Rates By 30 September each year (where applicable).

Authorised representatives and insurance brokers

PricewaterhouseCoopers | 137 5 | Taxation

5.1 Developments 140 5.2 Corporate taxation 141 5.3 Personal taxation 150 5.4 Levies and premium taxation 151 5.5 Stamp duty 153 5.6 Key dates 158

PricewaterhouseCoopers | 139 5.1 Developments The new Labor Government has confirmed its commitment to tax reform by announcing its goal of making Australia the financial services hub of Asia. In particular, the Government has asked the Board of Taxation to review certain tax treatments applicable to the managed funds industry. This is in addition to the Board reviewing Australia’s foreign source income anti- deferral and share buy back regimes. Other key income tax developments are summarised below: • The Treasurer announced in October 2007 that income tax laws will be amended to provide capital gains tax relief for policy holders of health insurers who demutualise. • New legislation was introduced removing the $100million cap which limited a company’s ability to access the same business test for the purposes of recouping prior year losses. • New legislation was introduced which effectively removes the quarantining of foreign tax credits and foreign losses. However, excess foreign tax credits arising after 30 June 2008 will no longer be able to be carried forward. • In June 2007, the Government announced that the tax treatment of rights issues will be restored to that which existed before the High Court’s decision in McNeil’s case. • A new withholding tax regime was introduced to apply to trustees making distributions to foreign residents of managed investment trusts. During 2007/8, the ATO has issued key Goods and Services Tax (GST) rulings that are likely to have an impact on insurers: • GST Ruling 2007/2 – Goods and Services Tax Ruling: In the application of paragraph (b) of item 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 to a supply, when does ‘effective use or enjoyment’ of the supply take place outside Australia. This final ruling (previously released in draft form as GSTR 2006/D2) relates to contractual agreements between an Australian entity and an offshore entity that involves some or all of the supply of services effectively being used or enjoyed in Australia. • GST Ruling 2008/1 – Goods and Services Tax Ruling: When do you acquire anything or import goods solely or partly for a creditable purpose? This final ruling (previously released in draft form as GSTR 2007/D1) explains factors that provide guidance in determining whether an acquisition or importation is for a creditable purpose. Although applicable to all businesses, the ruling specifically addresses acquisitions or importations relating to making supplies that would be input taxed, and therefore it is relevant to the supply of life insurance.

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5.2 Corporate taxation The commentary below is a summary of the significant income tax reform measures and does not attempt to provide an exhaustive coverage of the relevant law.

Tax consolidation The tax consolidation rules apply to 100 per cent-owned corporate groups to treat them as effectively a single entity for income tax purposes. Due to the complexity of the rules, they are regularly being updated, refined and clarified. However, there continues to be a number of key issues which await resolution especially around the calculation of cost setting amounts. In particular, the 2007 Federal Budget announcements dealing with tax consolidation, including the cost setting rules for general insurers, have yet to be enacted. In addition, Treasury is looking at amending the tax consolidation rules to ensure that scrip for scrip transactions do not result in inappropriate tax benefits being obtained by taxpayers.

Taxation of financial arrangements The Australian Government announced its intention to overhaul the law relating to the taxation of financial arrangements (TOFA) more than a decade ago. The changes involved a four-stage process. The first stage, which came into effect on 1 July 2001, introduced new rules to distinguish debt from equity for some, but not all, taxpayers. The second stage of TOFA, which was introduced with effect from 1 July 2003 revamped the treatment of foreign exchange gains and losses. The Government introduced legislation implementing the third and fourth stages of TOFA on 20 September 2007. This bill has subsequently lapsed due to the change in Government. However, the new Labor Government has confirmed its commitment to reintroduce the TOFA bill before parliarment although the timing is still unclear. The lapsed bill contained rules dealing with the tax-timing treatment of financial arrangements. The key measures were that: • gains and losses realised from financial arrangements are generally treated as assessable and deductible (i.e. on revenue account); and • the timing of realisation is dependent on the application of a number of tax-timing methods (some of which are elective). The elective methods generally align the tax treatment of financial arrangements with the accounting treatment; and • under the hedging election and provided certain requirements are met, tax should no longer distort the effectiveness of hedges as the rules allow the timing of gains and losses to be hedged without character (ie revenue versus capital) mismatches. There are a number of exemptions from the application of the TOFA rules. In particular, general insurance and life insurance policies are specifically excluded, and there is a specific carve-out that allows life companies to make separate elections to the rest of the tax consolidated group.

PricewaterhouseCoopers | 141 General insurance In Australia, general insurance companies are assessed under Division 321 of the Income Tax Assessment Act (ITAA) 1936. Tax is payable on the profits of a general insurer at the corporate tax rate, currently 30 per cent.

Premium income Division 321 of the ITAA legislates the manner in which premium income is earned by an insurer for taxation purposes. An insurance premium has a number of components. The gross premium, including components referable to fire brigade charges, stamp duty and other statutory charges must be included as assessable income. Insurers must recognise premium income from the date of attachment of risk. As a result, unclosed business will be brought to account in calculating tax liability. Subject to the following comments on unearned premium reserve, all premiums received or receivable in that year are included in assessable income.

Unearned premium reserve Where part of the premium relates to risk in a future year, an unearned premium reserve (UPR) is established. When the UPR is greater at year-end than it was at the beginning, a deduction is allowed for the increase. Where it decreases over the year, the decrease is included in assessable income. The legislation prescribes the way UPR is to be calculated. In particular, expenses relating to the issuing of policies, as well as reinsurance, reduce the amount of the UPR. The Commercial Union Australia Mortgage Insurance Corporation (CUAMIC) case in 1996 considered the tax implications of a change in the methodology adopted in calculating the UPR. It was held that the full reduction in UPR in the year was assessable, even though part of the reduction related to a change in methodology. The legislation reinforces this decision by bringing to account the movement of the UPR from one year to the next, which will automatically account for changes in the earning pattern of the premiums.

Apportionable issue costs (acquisition costs) Costs incurred in obtaining and recording premiums are allowable deductions in the year of income in which they are incurred. These costs include commissions and brokerage fees, processing costs, risk assessment fees, fire brigade charges, stamp duty and other government charges and levies (excluding GST). The benefit of an immediate deduction for apportionable issue costs incurred during a year of income is effectively restricted, as these costs are taken into account in the determination of the unearned premium reserve. This is achieved by determining the UPR based on gross premiums net of apportionable issue costs.

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Prepayments The prepayment legislation would normally apply to apportionable issue costs and reinsurance expense. However, as the methodology for calculating the unearned premium reserve includes a reduction component for these expenses, the legislation excludes these expenses from the prepayment rules. Treaty non-proportional reinsurance, which is not taken into account in determining the UPR, remains subject to the prepayment rules.

Outstanding claims A deduction is allowed for any increase in the outstanding claims reserve during the year, while decreases in the outstanding claims reserve are assessable. In addition, claims paid during the year are deductible. This effectively mandates a balance sheet approach for determining the claims expense for the year, and with the exception of indirect claims settlement costs, should align with the current accounting treatment of claims. This means that a deduction is allowed for the estimated cost of settling reported claims and claims incurred but not reported (IBNR) during the year of income. The deduction is based on the costs of claims incurred and paid during the year of income, an estimate of costs to be paid in respect of claims incurred during the year and a revision of previously estimated costs of claims incurred in prior years. These estimates must be soundly based but may take prudential margins into account. The following factors may be taken into account in determining the quantum of the allowable deduction for outstanding claims and IBNR provisions: • Direct policy costs • Claims investigation and assessment costs • Direct claims settlement expenses • Estimated increased costs of litigation and other factors, such as superimposed inflation and • Recoverables, including reinsurances, excesses and salvage and subrogation. These factors allow for the effects of inflation. However, only the present value (i.e. the value after discounting for future investment income) of costs associated with long-term claims is an allowable deduction. A deduction is not allowed for estimated indirect claims settlement costs (e.g. overheads) that cannot be attributed to a particular claim, until those expenses are paid.

Profits or losses on realisation of investments The purchase and sale of investments are regarded as part of the income-producing activities of a general insurer. As a consequence, profits or losses on the sale of investments are generally considered to be of a revenue nature. Profits will be assessable as ordinary income, while losses will be allowable deductions. However, a profit or loss arising on the sale of a capital asset that is not part of the insurance business may be treated as a capital gain or loss.

PricewaterhouseCoopers | 143 It is generally accepted that a building used as a head office or permanent place of business by an insurer is a capital asset. Unrealised profits and losses on investments are not currently brought to account as assessable income or allowable deductions for tax purposes.

Reinsurance Generally, a premium paid for reinsurance will be an allowable deduction in the year in which the premium is incurred. Because such premiums (other than treaty non- proportional reinsurance premiums) reduce gross premiums in calculating the unearned premium reserve, the benefit of the deduction allowed in any year is effectively limited to the proportion of risk covered by the premium that has expired during the year. Reinsurance recoveries are assessable income and future recoveries must be taken into account in determining outstanding claims reserves (unless the reinsurance is with a non- resident firm and a section 148(2) election has not been made).

Reinsurance with non-residents Where a general insurer reinsures the whole or part of any risk with a non-resident, a deduction will not be allowed in the first instance in respect of those premiums. These reinsurance premiums will not reduce gross premiums in calculating the unearned premium reserve and reinsurance recoveries will not be assessable. However, an insurer may elect that this principle does not apply in determining its taxable income, in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, these reinsurance premiums should be included in the calculation of UPR, and recoveries under those reinsurance policies included in the calculation of the outstanding claims reserve (OCR).

Financial reinsurance The ATO considers (in TR96/2) that financial insurance and financial reinsurance arrangements should be treated as the provision and repayment of loans. In determining whether an arrangement constitutes financial insurance or reinsurance, reference is made to two criteria: • The degree of insurance risk assumed and • The possibility of the insurer/reinsurer incurring a significant loss under the arrangement. An insurer needs to prove both of these to support a claim for a deduction of a reinsurance premium.

Life insurance The rules governing how life companies are taxed are contained in Division 320 of the ITAA.

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Classes of income The income of a life insurance company is effectively divided into three classes: the Ordinary Class, the Complying Superannuation Class or Virtual Pooled Superannuation Trust (VPST) Class (both being taxable) and a Segregated Exempt Assests (SEA) Class. The VPST Class is established for the company’s complying superannuation policies. Life insurance companies must establish a segregated asset pool for their immediate annuity policy liabilities, which is the SEA Class. All other classes of policies and any shareholder capital will form part of the Ordinary Class. The classification of income and gains among the various classes of income (assessable and exempt) is not determined by reference to statutory funds and the mix of policy liabilities (in the case of mixed statutory funds). Rather, the life insurance company must segregate its assets by allocating these as supporting certain (tax) classes of policies it has issued. Life insurance companies pay tax on income derived in the Ordinary Class at the rate of 30 per cent and are ordinarily taxed at a rate of 15 per cent on income derived from VPST assets. Any income derived from the SEA Class is exempt from tax. A life insurance company remains a single entity for taxation purposes. However, the effect of the rules outlined above is that for taxation purposes, the company is effectively divided into three pools, with each segment representing a particular class of business. A life insurance company can also form part of a tax consolidated group, in which case the head company will be deemed to be a life insurance company.

Assessable income Tax is levied on the fee income and underwriting profits of a life insurer. A life insurer has always included investment income and realised gains on the disposal of assets in its assessable income. Assessable income also specifically includes life insurance premiums “paid” to the company, reinsurance amounts received, refunds of reinsurance paid under a contract of reinsurance and amounts received under a profit-sharing arrangement under a contract of reinsurance. In an Interpretative Decision, the ATO states that premium income should be recognised on an accruals basis. Amounts representing a decrease in the value of the net risk components of risk policy liabilities and taxable contributions transferred from complying super funds or approved deposit funds (ADFs) are also included in assessable income. Specified rollover amounts, fees and charges imposed in respect of life insurance policies but not otherwise included in assessable income and taxable contributions made to retirement savings accounts provided by that company also form part of the life company’s assessable income. Furthermore, most transfers of assets from one class to another will have a tax consequence. It is therefore necessary to carefully review and record each transfer to ensure its appropriate tax treatment.

PricewaterhouseCoopers | 145 Disposal of investments Whether a profit or gain realised on the disposal or transfer of an investment is liable to tax (and the rate of tax) depends on the class of income to which it relates. Gains and losses realised on certain VPST assets are determined by reference to the general capital gains tax provisions (which is consistent with the treatment of disposals of investments by superannuation funds). The legislation also provides that a “deemed disposal” will arise where there is a transfer between the asset pools of an asset other than money. For tax purposes, an assessable gain may arise for the “transferor” or “transferee” asset pool. A different rule, being a deferral mechanism, applies where an asset transfer results in a loss for tax purposes. Similar to the tax treatment for general insurers, investments in the Ordinary Class are usually held on revenue rather than on capital account. Accordingly, profits on the disposal of such investments would be included in assessable income as ordinary income. Profits and losses on the disposal of investments held in the SEA Class are not taxable or deductible. Each year, a life company is required to carry out a valuation of its VPST liabilities and exempt policy liabilities. Where the valuation of the corresponding asset pool exceeds the respective value of these liabilities (plus a reasonable provision for tax), the company must transfer the excess out of that asset pool. Where the valuation indicates a shortfall, the company may transfer assets into the pool. Such transfers will have the taxation consequences outlined above.

Management fee income Where a life insurance company imposes fees and charges on policies included in the asset pools representing the VPST and SEA classes, it is required to transfer an amount equal to those fees and charges out of these pools. This will give rise to an assessable amount in the Ordinary Class, as well as a deduction in the VPST Class, but no deduction in the SEA Class. This requirement ensures that any fees and charges imposed by the life insurance company are taxed at the prevailing corporate tax rate.

Investment income A life insurer is required to separately calculate the investment income from each of its asset pools. This means adequate accounting records must be maintained to separately identify each of these pools, which will differ from the normal statutory fund basis of asset allocation.

Allowable deductions The current tax provisions are based on the principle that a deduction is allowed for expenses of a revenue nature to the extent they are incurred in gaining or producing assessable income. A life insurance company is allowed certain specific deductions. These include certain components of life insurance premiums (see below), the risk component of claims paid under

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life insurance policies, the increase in the value of risk policy liabilities, certain reinsurance premiums and amounts transferred to the SEA Class. Premiums are fully deductible if they are transferred to the SEA Class, or if they are for policies providing participating or discretionary benefits. Part of the premium may be deductible if they are transferred to the VPST Class. The deductible component of premiums in respect of ordinary non-participating investment policies would normally be determined by an actuary. In relation to risk-only policies, such as term insurance policies, deductions will be allowed for the increase in the value of those policy liabilities over the financial year (conversely, decreases will be assessable). An actuary would generally assist in calculating these assessable and deductible amounts.

Allocation and utilisation of losses A life insurance company remains a single entity for tax purposes but in effect will be divided into three separate taxpayers, each representing a separate class of business. The idea of notional separate taxpayers for each class of business limits the way in which tax losses and capital losses can be used by a life company. Capital losses from VPST assets can be applied only to reduce capital gains from VPST assets or carried forward to be used in a later year against capital gains derived in the VPST Class. Similarly, capital losses from Ordinary Class assets can be applied only to reduce capital gains from Ordinary Class assets or carried forward to be used in a later year against future capital gains generated by that class. Ordinary Class revenue losses can only be applied against Ordinary Class assessable income. Similarly, VPST revenue losses can only be applied against VPST assessable income. No assessable gains or deductible losses (including capital gains and losses) will arise from the SEA pool. Certain types of income, including SEA income and income from the disposal of units in a pooled superannuation trust, are classified as “non-assessable non-exempt income”. As a result, tax losses incurred by a life insurance company will not be wasted against these non- assessable non-exempt income amounts before being offset against assessable income.

Imputation credits A life insurance company is entitled to franking credits in its franking account for the payment of tax on income and/or the receipt of franked dividends attributable to Ordinary Class business. This means that no franking credits are recorded in a life insurance company’s franking account for tax paid on income from assets held in the VPST Class and SEA Class or franked dividends received from assets held in those classes. In this way, the imputation rules for life insurers are consistent with other non- life corporate taxpayers. A life insurance company is generally entitled to a tax offset for imputation credits attached to dividends received from assets held in the Ordinary Class and VPST Class. Excess imputation credits are refundable to the VPST Class. As the SEA Class does not generate taxable income, any imputation credits generated by the assets in this class are also refundable.

PricewaterhouseCoopers | 147 There are special rules for life insurance companies which enable the offset of a franking deficit tax liability against the income tax liability attributable to shareholders business in the Ordinary Class. These rules complement the normal franking deficit provisions which apply to all companies.

Reinsurance with non-residents Where a life insurance company reinsures all or part of any risk associated with disability policies with a non-resident, a deduction will not be allowed in respect of those premiums and an amount will not be assessable in respect of any recoveries. The company’s net risk liabilities includes so much of the risk component as is reinsured with the non-resident reinsurer. However, a life insurance company may elect that this principle does not apply in determining its taxable income, in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, the company’s net risk liabilities do not include the risk component which is reinsured with the non-resident reinsurer.

Health insurance An organisation which is a registered health benefits organisation for the purposes of the National Health Act 1953, and which is not in business for the purposes of profit or gain for its individual members, is exempt from income tax. The fact that a health fund may offer rebates and/or discounts to members has not been construed as the distribution of profits or gains to members. Accordingly, the scope of this exemption will depend generally on the type of activities carried out by the organisation insofar as they do not disqualify it from registration under the Act. Registered health benefit organisations that operate for the purposes of profit or gain are taxed like normal corporates. However, as Division 321 does not apply to health insurers, IT 2663 will be relevant. Where health insurers seek to demutualise, there are issues around the tax treatment to policy holders. Accordingly Treasury has announced that the Government intends to amend the tax laws to provide capital gains tax certainty for policy holders and where appropriate, tax relief where policy holders receive shares.

Authorised representatives and insurance brokers Tax legislation does not contain specific provisions relating to the taxation of authorised representatives and insurance brokers. One of the important tax issues confronting authorised representatives and insurance brokers is the timing of recognition of commission and brokerage income. The ATO has issued Taxation Ruling IT2626 to provide guidance on this issue. The terms of the contract or arrangement between the insurer and the authorised representative or insurance broker will be of major importance in determining when commission and brokerage income is derived.

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An authorised representative or insurance broker is able to recognise an amount of commission or brokerage as income for tax purposes at different points of time. Examples include: • When that amount has become a recoverable debt and the authorised representative or insurance broker is not obliged to take any further steps before becoming entitled to payment. • When the insurance broker can first withdraw that amount from an insurance broking account. • When that amount has actually been received from the insurer in those situations where the gross premium has been forwarded by the insured directly to the insurer, provided that the receipt by the authorised representative or insurance broker of that amount had not been deferred unreasonably. • When that amount has been withheld by the authorised representative or insurance broker from the net premiums passed onto the insurer. Which of these different scenarios is most relevant in any particular situation will be influenced by the terms of the contract between the authorised representative or insurance broker and the relevant insurer. The authorised representative or insurance broker will be allowed a deduction in the year in which brokerage and commission is refunded where that amount had previously been included in the assessable income of the authorised representative or insurance broker.

PricewaterhouseCoopers | 149 5.3 Personal taxation Table 5.1 – Rates of personal tax for residents from 1 July 2007 (i.e. 2008 rates)

Income range per annum $ Marginal rate %

0 – 6,000 NIL

6,001 – 30,000 NIL + 15% of excess over $6,000

30,001 – 75,000 $3,600 + 30% of excess over $30,000

75,001 – 150,000 $17,100 + 40% of excess over $75,000

150,001+ $47,100 + 45% of excess over $150,000

Medicare Levy 1.5%

Table 5.2 – Proposed rates of personal tax for residents from 1 July 2008 (i.e. 2009 rates) (Bill before Parliament)

Income range per annum $ Marginal rate %

0 – 6,000 NIL

6,001 – 34,000 NIL + 15% of excess over $6,000

34,001 – 80,000 $4,200 + 30% of excess over $34,000

80,001 – 180,000 $18,000 + 40% of excess over $80,000

180,001+ $58,000 + 45% of excess over $180,000

Medicare Levy 1.5%

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5.4 Levies and premium taxation

General insurance

Fire brigades legislation Fire service levies are imposed on various classes of general insurance by state governments in New South Wales, Victoria and Tasmania to fund the cost of providing fire and emergency services. The levies vary in each state with different rates applying to various classes of insurance. However, Western Australia has abolished the levy with effect from 1 January 2004; property owners will fund their fire brigades in future. Policies which include coverage for risks prior to this date must include a proportional contribution to the levy. Audit reports are required on a quarterly basis in respect to the adequacy of systems used to determine the proportional contributions.

Insurance Protection Tax Act (NSW) 2001 The Insurance Protection Tax Act (NSW) 2001, which came into effect on 1 July 2001, imposes a tax on the total annual amount of general insurance premiums received by insurers in New South Wales. The tax was introduced to establish a fund to assist builders’ warranty and compulsory third-party policyholders affected by the collapse of HIH Insurance Limited. The tax for the year commencing on 1 July 2001 and for each subsequent year is $65 million. The tax for subsequent years may be reduced by determination of the New South Wales Governor on the recommendation of the New South Wales Treasurer. The tax is apportioned among general insurers according to their share of the total premium pool for the relevant year. Where insurance is undertaken with a non-registered insurer, an ad valorem duty of one per cent is imposed on dutiable premiums.

General Insurance Supervisory Levy Imposition Act 1998

Financial Institutions Supervisory Levies Collection Act 1998 This annual levy is based on a percentage of the value of assets of a general insurance company at a specified date. The unrestricted and restricted levy percentage, the specified date, and the minimum and maximum restricted levy amount for each financial year are determined by the Federal Treasurer (2007/2008: unrestricted levy of 0.006414 per cent of assets; restricted levy of 0.0169 per cent of assets; minimum restricted levy: $4,700; maximum restricted levy: $700,000).

PricewaterhouseCoopers | 151 Life insurance

Life Insurance Supervisory Levy Imposition Act 1998

Financial Institutions Supervisory Levies Collection Act 1998 This annual levy is based on a percentage of the value of assets of a life insurance company at a specified date. The unrestricted and restricted levy percentage, the specified date, and the minimum and maximum restricted levy amount for each financial year are determined by the Federal Treasurer (2007/2008: unrestricted levy of 0.000973 per cent of assets; restricted levy of 0.00391 per cent of assets; minimum restricted levy: $470; maximum restricted levy: $700,000).

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5.5 Stamp duty

General insurance Stamp duty is generally chargeable on the amount of the premium paid in relation to an insurance policy (including any fire service levy where applicable). The amount of GST or reimbursement for GST is generally included in the amount on which duty is calculated. The rates of general insurance duty vary in each state and territory and in some states, by class of insurance. Generally, the liability for duty on general insurance policies falls on the general insurer.

Table 5.3 – Stamp duty rates – General insurance products

As at March 2006 Class Rate

NSW Type A Insurance other than Type B or Type C insurance 9% Type B Insurance for motor vehicles, aviation, disability, occupational health and hospital 5% Type C Insurance for livestock, crops

VIC, WA, ACT, NT All 10%

QLD Class 1 Insurance other than Class 2 insurance or CTP 7.5% insurance Class 2 Insurance such as professional indemnity, motor vehicle (not CTP insurance), personal injury from air 5% travel, first home mortgage, life insurance rider

SA All 11%

TAS All 8 %

Life insurance Stamp duty on life insurance is generally calculated on the sum insured. The rates of duty vary in each state and territory. Generally, temporary or term insurance is subject to duty at the rate of 5 per cent of the first year’s premium. Western Australia no longer imposes stamp duty on life insurance policies entered into after 1 July 2004. Policies entered into prior to this date continue to be subject to life insurance duty at the same rate as New South Wales, Queensland, Tasmania, Australian Capital Territory and Northern Territory. However, life insurance riders which are be categorised as a separate policy of general insurance will continue to be subject to duty at general insurance rates in Western Australia.

PricewaterhouseCoopers | 153 Table 5.4 – Stamp duty rates – Life insurance products

As at March 2006 Life insurance Term or temporary insurance

NSW, QLD, TAS, ACT, NT 0.10% of sum insured 5% of first year’s premium

VIC 0.12% of sum insured 5% of first year’s premium

SA 1.5% of premium 1.5% of premium

WA No duty payable No duty payable

Life insurance riders A life insurance rider is dutiable in all states and territories. In New South Wales and the Australian Capital Territory, the amount of duty chargeable on a life insurance rider is five per cent of the first year’s premium on the rider. In Queensland, a life insurance rider is treated as Class 2 general insurance and attracts duty at the rate of five per cent of the premium to the extent that the premium is paid to affect that class of insurance. In Victoria, Western Australia, Tasmania and the Northern Territory, a life insurance rider will be subject to the applicable life insurance rate unless the rider is characterised as a separate policy of general insurance, in which case duty is payable at the general insurance rate applying in the relevant jurisdiction (see table 6.4). Some states have adopted the view that life insurance riders should be characterised as general insurance. However, the correct interpretation of policies and riders will depend on the terms of the specific insurance contracts. Some states have issued revenue rulings dealing with life insurance riders. These rulings should be considered when determining the current rate of duty payable on life insurance riders. Most states and territories are also participating in a project to create a rewritten “Uniform Life Model” for life insurance duty.

Goods and Services Tax GST was introduced in Australia with effect from 1 July 2000. Under the Australian GST legislation, different types of insurance are treated differently, leading to different implications for insurers and the insured. The provision of general insurance is, in most cases, a “taxable supply”. Insurers are required to account for GST of one-eleventh of the premium income collected (excluding stamp duty). They are also entitled to claim input tax credits for the GST included in the price of expenses they incur that relate to making supplies of general insurance (with certain exclusions which apply to all businesses). There is an exception with regard to the provision of health insurance, which is a GST-free supply (known as “zero-rated supplies” in other jurisdictions). This means that health insurers are not required to account for GST on premium income derived from their businesses, but they are still are entitled to recover input tax credits on the expenses incurred in making supplies of health insurance.

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In contrast, the provision of life insurance is usually an “input taxed” supply (known as “exempt supplies” in other jurisdictions), as the supply of an interest in certain life insurance businesses is defined to be a “financial supply” which, in turn, is input taxed for GST purposes. As a result, while life insurers are not required to account for GST on premium income derived from life insurance businesses, they are usually denied full input tax credits on many of the expenses incurred in making supplies of life insurance. However, life insurers may be entitled to recover a reduced input tax credit on certain specified expenses. These are known as “reduced credit acquisitions” and are specifically listed in the GST regulations. The current rate of reduced input tax credits is set at 75 per cent of the GST included in the price of particular expenses. It should be noted that the GST classification of general insurance and life insurance will be different if either supply is made for consumption outside Australia, in which case the supply of these policies may be GST-free. Insurance that is provided as part of certain transport services will lose its character as insurance and will take on the GST character of the other services supplied. For example, insurance provided as part of exporting goods will also be GST-free. Where an insurance policy may be treated as either GST-free, taxable or input taxed, the GST-free treatment will prevail.

General insurance The GST legislation contains complex provisions in respect of general insurance businesses. The effect of these provisions is summarised below. • GST, where applicable, is chargeable on the stamp duty-exclusive amount of the premium. As GST forms part of the “price” of a supply, it constitutes one-eleventh of the price paid for the premium (based on the prevailing GST rate of 10 per cent). Stamp duty will be calculated on the GST-inclusive amount of the premium. • At or before the time a claim on the policy is made, the insured must notify the insurer as to the extent of the input tax credit they are entitled to claim on the policy. Failure to do so could adversely affect the GST position for both the insurer and the insured. • An insurer will not have to account for GST on supplies made in the course of settling a claim if it has received notification from the insured entity of its entitlement to claim input tax credits on the premium paid for the insurance. Furthermore, it can generally claim input tax credits when acquiring goods and services that are to be supplied in settlement of a claim, provided the policy was not initially a GST-free supply. • Where the insured was not entitled to claim an input tax credit in respect of the premium, the insurer is entitled to make a decreasing adjustment mechanism (DAM) in respect of any settlement amount (in the form of cash and/or goods or services) paid out under that policy. • Where the insured was entitled to claim a full input tax credit for GST included in the premium, there is no entitlement to a DAM for the insurer when they make a settlement under the policy. • If the insured is entitled to partial input tax credits on the premium, the insurer is entitled to a partial DAM.

PricewaterhouseCoopers | 155 • The receipt of an excess payment can trigger a GST liability as an increasing adjustment for the insurer. The actual liability is based on a specific formula contained in the GST law. There are special GST rules dealing with the various state and territory-based compulsory third party (CTP) insurance schemes. The new GST laws were introduced in 2003 to address the statutory and working differences between CTP and general insurance businesses.

Life insurance The supply of a life insurance policy is included within the definition of financial supply and, as such, will be input taxed for GST purposes. This means that life insurance companies will not be liable for GST on the supply of life insurance premiums, but will be denied input tax credits for acquisitions that relate to the supply of life insurance (subject to the life insurers being entitled to claim reduced input tax credits). The meaning of life insurance from a GST perspective is linked to certain provisions of the Life Insurance Act 1995. The GST regulations also stipulate that a supply that is incidental to another financial supply will itself be input taxed, subject to certain criteria being met. Certain products can be declared by APRA to be life insurance, and others will qualify as life insurance due to being related businesses (e.g. certain disability insurance). Generally, as noted above, the consequence of input taxed classification is that input tax credits are not available for expenditure incurred in connection with making input taxed supplies of life insurance. This means that life insurance companies will not be entitled to recover all the GST included in the price paid for acquisitions of goods and services from suppliers, which has a consequential direct impact on their net costs. However, the GST law also contains provisions which allow financial supply providers to claim reduced input tax credits on certain acquisitions. For life insurers, reduced input tax credit acquisitions include outsourced life policy administration services.

Investment activities Investment activities are, like life insurance businesses, input taxed in many cases, as they are classified as financial supplies for GST purposes. The effect of this is that, while GST will not be payable on the supplies made, not all of the GST incurred as part of the price paid for costs associated with investment activities will be recoverable unless one of the following exceptions applies: The expense relates directly to the purchase or sale of securities or other investments in an overseas market. The expenses incurred by the insurer for the purpose of making input taxed financial supplies do not exceed the “financial acquisitions threshold” (which is a “de minimus” test to ensure that entities that do not usually make financial supplies are not denied input tax credits on making financial supplies that are not a significant part of their principal commercial activities). The financial supply is a borrowing and the borrowing relates to supplies which are not input taxed. Where the above exceptions apply, the insurer retains the entitlement to fully recover the GST incurred on related costs. However, where the exceptions do not apply, the insurer will have to

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use an appropriate apportionment methodology to determine the extent to which it is entitled to recover GST incurred on general costs. It should be noted that where acquisitions made by an insurer for the purpose of its investment activities are “reduced credit acquisitions”, the insurer is entitled to claim a reduced input tax credit equal to 75 percent of the GST included in the price of the expense.

Other issues In addition to specific insurance provisions, insurers must comply with the more general GST requirements that affect all GST-registered enterprises. For example, not all GST on acquisitions is creditable; there is a complex interaction with Fringe Benefits Tax. Also, the GST law takes a broader view of what constitutes ‘consideration’, so in some instances non- monetary forms of consideration could be included within the scope of a supply made for consideration (which may potentially create a liability to GST). Also, guarantees are treated differently from insurance, and distinguishing the two can be extremely complex.

PricewaterhouseCoopers | 157 5.6 Key dates

General insurance

Stamp duty legislation

Lodgement of returns and payments • New South Wales, Victoria, Australian Capital Territory, Tasmania, Western Australia and the Northern Territory Within 21 days after the end of each month. • South Australia Within 15 days after the end of each month. Annual licence to be applied for by 31 January of each year. • Queensland Within 14 days after the end of each month or such other period as the Commissioner may determine.

Table 5.5 – Fire brigade legislation

Lodgement of return Payment of charges

NSW – Fire In September each Fire brigades Brigades and Bush year (audited) Fire brigades’ quarterly advance payments and bush fires Fires due by 1 July, 1 October, 1 January and 1 April. Advance payments to be adjusted based on returns lodged in September in the following financial year

Bush fires Quarterly payments due on the first day of each quarter

VIC – Metropolitan Before 15 August Metropolitan and country and Country each year Metropolitan quarterly advance payments and country due by 1 July, 1 October, 1 January and 1 April. Advance payments to be adjusted based on returns lodged by 15 August in the following year.

TAS Within 14 days after Payment made with monthly return the end of each month

Insurance Protection Act (NSW) • Lodgement of returns by 15 August of each year. • Notices of assessment issued by 1 September of each year. • Quarterly payments due by 15 September, 15 December, 15 March and 15 June of each year.

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General Insurance Supervisory Levy Imposition Act

Financial Institutions Supervisory Levies Collection Act • Due date for payment is specified in the APRA notice (and is not earlier than 28 days after the day on which the notice is given).

GST Administration • Returns and payments are due on the twenty-eighth day following the end of the tax period in respect of quarterly remitters. Returns and payments are due on the twenty- first day following the end of the tax period if the insurer is a monthly remitter.

Life insurance

Stamp duty legislation

Lodgement of returns and payments • New South Wales, Australian Capital Territory, Tasmania and Northern Territory Within 21 days after the end of each month. • Victoria Within 14 days after the end of each month. • South Australia Annual licence to be applied for by 31 January of each year. Payment upon application. • Queensland Usually within 14 days after the end of each month (or such other period as the Commissioner may determine).

Life Insurance Supervisory Levy Imposition Act

Financial Institutions Supervisory Levies Collection Act • Due date for payment is specified in the APRA notice (and is not earlier than 28 days after the day on which the notice is given).

PricewaterhouseCoopers | 159 6 | Insurance legislation

6.1 Commonwealth legislation 162 6.2 State and territory legislation 168 6.3 Industry codes 168

PricewaterhouseCoopers | 161 The insurance industry in Australia is governed by Commonwealth, state and territory laws, and industry codes. Key legislation and codes affecting the insurance industry include the following:

6.1 Commonwealth legislation

Developments The insurance industry over the last year has experienced several amendments to its legislation. The following two amendments had the greatest impact, and affected the below mentioned Acts: Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (the SRR Act) • Life Insurance Act 1995 • Insurance Act 1973 • Financial Sector (Collection of Data) Act 2001 • Financial Institutions Supervisory Levies Collection Act 1998 • Life Insurance Supervisory Levy Imposition Act 1998 • Authorised Non-Operating Holding Companies Supervisory Levy Imposition Act 1998 • Corporations Act 2001 • Australian Securities Investment Commission Act 2001 Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007 • Insurance Act 1973 • Financial Sector (Collection of Data) Act 2001 • Corporations Act 2001

Acts

Australian Prudential Regulation Authority Act 1998 This Act establishes the Australian Prudential Regulatory Authority (APRA) and its powers and duties. Details of the aims and role of APRA are contained in Chapter 2.

Life Insurance Act 1995 The Life Insurance Act sets out, among other things, rules for structuring and managing life companies so that the interests of policyholders and shareholders are protected. APRA is the prudential supervisor of life companies under this Act.

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Insurance Act 1973 The Insurance Act governs the solvency and reporting requirements of general insurers and non-operating holding companies. APRA performs prudential supervision under this Act and is responsible for issuing prudential standards.

Private Health Insurance Act 2007 The Private Health Insurance Act 2007 (the Act) came into effect on 1 April 2007, replacing the National Health Act 1953. The Act sets out rules governing private health insurance products and how insurers conduct their health insurance business. It also aims to provide incentives to encourage people to have private health insurance. The Transitional Provisions and Consequential Amendments Act 2007 was also implemented in April 2007, to provide advice for transitional matters and make consequential amendments, relating to the enactment of the Private Health Insurance Act 2007.

Financial Sector (Collection of Data) Act 2001 This Act gives APRA the legislative power to collect financial information from regulated entities, including general and life insurers. It is under these powers that annual and quarterly returns are obtained.

Insurance Acquisitions and Takeovers Act 1991 Financial Sector (Shareholdings) Act 1998 These Acts limit shareholdings in insurers to 15 per cent unless otherwise approved by the Federal Treasurer. Similarly, offers to buy more than 15 per cent of an insurer require the Treasurer’s approval.

Financial Institutions Supervisory Levies Collection Act 1998 General Insurance Supervisory Levy Imposition Act 1998 Life Insurance Supervisory Levy Imposition Act 1998 Authorised Non-Operating Holding Companies Supervisory Levy Imposition Act 1998 These Acts provide the legislative backing to collect annual fees from licensed insurers and authorised non-operating holding companies. The fees contribute to the operating costs of APRA. From 1 July 2005, financial sector levies comprise two distinct components: • Restricted levy – This component relates to the cost of supervision and involves a single levy rate for each of the financial sectors examined by APRA. It includes an annual cap on this component of the levy; and • Unrestricted levy – This component factors in size and complexity considerations. It is a low rate levy on assets without any maximum levy amount. The General Insurance Supervisory Levy Imposition Amendment Bill 2006 is currently before Parliament. The proposed amendments permit different levies to be applied for different

PricewaterhouseCoopers | 163 classes of general insurance companies. The amendments apply for the financial year commencing on 1 July 2006.

Private Health Insurance (Council Administration Levy) Act 2003 Private Health Insurance (Collapsed Insurer Levy) Act 2003 Private Health Insurance (Risk Equalisation Levy) Act 2003 These Acts were introduced to ensure the ongoing validity of health insurance levies in terms of the requirements of Section 55 of the Constitution of the Commonwealth of Australia, which states that laws of taxation must concern taxation only.

Corporations Act 2001 The Corporations Act requires the seller of certain types of financial products (including insurance products) to hold an Australian Financial Services Licence (AFSL) and provide certain product disclosures when selling financial products. In addition, licence holders that are not regulated by APRA (e.g. insurance brokers) must comply with specified solvency requirements. The Australian Securities and Investments Commission (ASIC) is responsible for the supervision of licensing and compliance with the Act. How the Corporations Act applies to insurance companies largely depends on whether they are selling wholesale or retail financial products as defined by the Act. The sale of retail financial products is more stringently regulated than the sale of wholesale products. The definition of “retail” under the Act covers both individuals and small business. Generally speaking, the financial products defined by the Act include both life risk and investment risk products for life insurers, and all general insurance products. The definition of “financial products” explicitly excludes reinsurance and health insurance. Refinements to the regulations associated with the sale and distribution of financial products were finalised in December 2005. The regulations aim to provide simple oral and streamlined disclosure in relation to basic deposit products and general insurance products. Further information is contained in Chapters 2 and 3.

Insurance Contracts Act 1984 Marine Insurance Act 1909 The Insurance Contracts Act governs the issue of policies for many classes of insurance but excludes reinsurance, health insurance, compulsory third-party motor insurance and workers compensation. It applies to all consumer insurance contracts and is supervised by ASIC. Following the implementation of the Australian Financial Services Licensing regime, the Act largely relates to disclosures required from the insured. All other insurer-related disclosure requirements have been incorporated into the Corporations Act. The Marine Insurance Act applies to all marine insurance contracts except those covering pleasure craft, which are governed by the Insurance Contracts Act.

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Health Insurance Commission Act 1973 This Act governs the operation of the national medical system, Medicare, and its operator, Medicare Australia.

Private Health Insurance Incentives Act 1998 The Private Health Insurance Incentives Act provides for a 30 per cent rebate on health insurance premiums paid directly to either health insurers or to the policyholder.

Terrorism Insurance Act 2003 The Terrorism Insurance Act provides for insurance coverage of declared terrorist acts and renders terrorism exclusion clauses ineffective for commercial property located in Australia. The Act establishes a statutory corporation, the Australian Reinsurance Pool Corporation (ARPC), that provides reinsurance to registered insurers that do not wish to retain the risk of terrorism coverage themselves or obtain reinsurance from other reinsurers.

Privacy Act 1988 All companies with turnover of more than $3 million, including insurance companies, are subject to the Privacy Act. This imposes obligations on how companies collect and handle personal information and aims to protect individuals who give such information to organisations. Compliance with privacy requirements is monitored by the Federal Privacy Commissioner.

Australian Securities Investments Commission Act 2001 (ASIC Act) Companies that sell insurance products must comply with the consumer protection provisions of the ASIC Act. The Act prohibits false or misleading advertising.

Trade Practices Act 1974 The Trade Practices Act addresses the promotion of competition and fair trading. Specific sections cover anti-competitive practices and price exploitation. The Act also establishes the Australian Competition and Consumer Commission (ACCC) to oversee the promotion of competition and fair trading. The Act was recently changed to close a perceived loophole that allowed litigants to bypass state and territory laws, and make claims under this Act for personal injuries and death.

Prices Surveillance Act 1983 The Prices Surveillance Act is administered by the ACCC, which works with the Consumer Affairs Division of the Department of Treasury and ASIC to protect consumer interests. Under this Act, the ACCC is empowered to conduct pricing enquiries and vet price rises of businesses under prices surveillance. Medical indemnity insurance, public liability and professional indemnity insurance are currently subject to monitoring. The ACCC monitored medical indemnity premiums for three years to assess whether they were actuarially and commercially justified. The last of the three annual monitoring reports was released in December 2005.

PricewaterhouseCoopers | 165 Medical Indemnity Act 2002 Medical Indemnity Agreement (Financial Assistance Binding Commonwealth Obligations) Act 2002 Medical Indemnity (Consequential Amendments) Act 2002 Medical Indemnity (UMP Support Payment) Act 2002 Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 Medical Indemnity (Run-off Cover Support Payment) Act 2004 Medical Indemnity (Competitive Advantage Payment) Act 2005 Medical Indemnity Legislation Amendment (Competitive Neutrality) Act 2005 The above legislation regulates the operations of Medical Defence Organisations (MDOs) and provides guarantees and assistance to enable them to meet their claims obligations. With effect from 1 July 2003, only registered insurers, including those owned by MDOs, are permitted to offer medical indemnity insurance. The legislation outlines the minimum coverage that medical indemnity products must provide and stipulates that such products must provide “claims-made” coverage. The legislation includes: • transitional provisions for the improvement of the capital adequacy of MDOs; • funding of half the cost of claims over $300,000 by the HIC; • a premium support scheme, providing a subsidy to doctors with excessive premiums; and • a run-off cover scheme, providing eligible retired doctors coverage for claims at a nominal cost. The run-off cover scheme is funded by a levy on the premiums of medical indemnity insurers. An independent review of competitive neutrality in the medical indemnity insurance market was performed in early 2005. The review found that the specific assistance given to United Medical Protection Limited (“United”) had resulted in a competitive advantage. The review suggested that this arose because the Australian Government had taken over all of United’s legacy commitments, allowing it, unlike other medical indemnity providers, to concentrate only on the future. The review recommended that to redress the balance it would be necessary for United to make a series of regular payments to compensate the Government for assuming its obligations. The Government accepted these recommendations and the first contribution year started on 1 July 2005 and will end on 1 July 2014, although the final year can be brought forward by regulations. Further, the payments the Government will receive from United (termed “competitive advantage payment”) will be used to reduce the payments doctors make under the United Medical Protection Support Payment (UMP SP) scheme. Under the new arrangements, members’ payments will be reduced by $1,000 annually. The number of contribution years will also be reduced from six to four years. The Government recently outlined possible amendments to the prudential and product standards of the Medical Indemnity (Prudential Supervision and Product Standards) Act. In 2006, Federal Treasury sought and received feedback about these proposals from various industry bodies. Comment was sought on a range of topics, including:

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• Implications of requiring APRA authorisation of entities indemnifying medical practitioners, but not requiring this for entities indemnifying other healthcare professionals; • Whether the product standards targeted at employed medical practitioners were necessary; and • Whether regulatory flexibility in prudential supervision is necessary to allow the Government to respond to the market as it evolves or whether this would introduce uncertainty for medical indemnity providers.

PricewaterhouseCoopers | 167 6.2 State and territory legislation There is a range of state and territory-based regulations that complements the Commonwealth legislation including: • Workers compensation legislation; • Compulsory third-party legislation; • Privacy legislation; and • Fair trading legislation.

6.3 Industry codes

General Insurance Code of Practice The General Insurance Code of Practice is a self-regulatory code developed and administered by the Insurance Council of Australia (ICA) and approved by ASIC. An independent review of the Code was completed in November 2004, and in response a new General Insurance Code of Practice was released on 18 July 2005. The new code was designed to improve customer service standards in the Australian insurance industry and protect the rights of policyholders. All members of the general insurance industry are encouraged to adopt the standards set out in the code whilst ICA members are requested to adopt the code. The Insurance Ombudsman service (103) monitor and report on compliance with the code. Nearly all types of general insurance, from house to travel and multi-million dollar business insurance, is included in the Code. The only types of general insurance that are not included are reinsurance (insurance for insurers) and insurance that has specific rules under Government statute. The Code is intended to be a “living Code”, which will be progressively developed after consultation with Government and other interested groups. The Code will be reviewed every three years and any amendments will be subject to the approval of ASIC.

General Insurance Brokers’ Code of Practice This Code was developed by the National Insurance Brokers Association (NIBA). Most Australian brokers subscribe to it. The Code is administered by Insurance Brokers Disputes Limited, who resolve disputes and receive annual complaints’ reports. Compliance with the Code is monitored by the Insurance Brokers’ Compliance Council, which comprises a consumer representative, a NIBA representative and an industry representative.

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7.1 Government authorities 170 7.2 Industry associations 174 7.3 Complaints review services 185 7.4 Registered general insurers 187 7.5 Registered life insurers 191 7.6 Registered health insurers 192 7.7 Government insurers 193 7.8 PwC Australian offices and industry experts 194

PricewaterhouseCoopers | 169 7.1 Government authorities Government bodies that undertake insurance activities (e.g. Victorian Workcover Authority) are listed in the government insurers section of this chapter.

ACT Workcover ACT Workcover is a government agency whose role is to prevent death, disease and injury in the workplace. Its work is supported by three main acts: the Occupational Health and Safety Act 1989, the Workers Compensation Act 1951 and the Dangerous Substances Act 2004. ACT Workcover oversees the operations of registered insurers that provide workers’ compensation insurance.

Level 3, Block B Tel: (02) 6205 0200 Callam offices, Easty Street Fax: (02) 6205 0336 Woden ACT 2606 Email: [email protected] www.workcover.act.gov.au

Acting Commissioner Mr S Hart

Australian Prudential Regulation Authority The roles and responsibilities of Australian Prudential Regulation Authority (APRA) are discussed in detail in Chapter 2 of this publication.

Level 26, 400 George St Tel: (02) 9210 3000 New South Wales 2000 Fax: (02) 9210 3411 www.apra.gov.au Email: [email protected] Chairman Mr J Laker

Australian Securities and Investments Commission The roles and responsibilities of Australian Securities and Investments Commission (ASIC) are discussed in detail in Chapter 2 and 4 of this publication. PO Box 4000 Tel: (03) 5177 3988 Gippsland Mail Centre Victoria 3841 Fax: (03) 5177 3999 www.asic.gov.au Email: [email protected] Chairman Mr J Lucy Commissioner Mr A M D'Aloisio

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Motor Accident Insurance Commission The Motor Accident Insurance Commission is the regulatory authority responsible for the management of the compulsory third-party (CTP) scheme in Queensland and insurers licensed under the scheme. Established under the Motor Accident Insurance Act 1994, the commission commenced operations on 1 September 1994 as a statutory body reporting to the state Treasurer. The chief executive is the Insurance Commissioner who, in this capacity, is also the Nominal Defendant. The commission is funded by a statutory levy payable with the CTP insurance premium. Interest earned on investments of the Motor Accident Insurance Fund and revenue from compliance fines, combined with a small surplus from the statutory levy, fund the commission’s research initiatives. Level 9, 33 Charlotte Street Tel: (07) 3227 8088 Queensland 4001 Fax: (07) 3229 3214 www.maic.qld.gov.au Email: [email protected] Insurance Commissioner Mr John Hand

Motor Accidents Authority The Motor Accidents Authority (MAA) is a statutory corporation established to administer the NSW Motor Accidents Scheme, the CTP personal injury insurance scheme for motor vehicles registered in New South Wales. The major aim of the authority is to lead and support a CTP scheme that minimises the impact of motor vehicle accidents.

Level 25, 580 George St Tel: 1300 137 131 Sydney Fax: 1300 137 707 New South Wales 2000 Email: [email protected] www.maa.nsw.gov.au

Chairman Mr R Grellman General Manager Mr D Bowen

PricewaterhouseCoopers | 171 Private Health Insurance Administration Council The role and responsibilities of the Private Health Insurance Administration Council (PHIAC) are discussed in detail in Chapter 2 of this publication.

Suite 16, Level 1 Tel: (02) 6215 7900 71 Leichhardt St Fax: (02) 6215 7977 Kingston Email: [email protected] Australian Capital Territory 2604 www.phiac.gov.au

Chief Executive Officer Ms G Ginnane

Workcover Western Australia WorkCover’s mission is to minimise the social and economic impact on workers of work-related injury and disease and achieve cost effectiveness for employers and the community. To ensure the state’s workers compensation and rehabilitation scheme runs smoothly for the people of Western Australia, WorkCover: • provides information and community education on all aspects of the scheme • monitors compliance with the Act to ensure employers are insured for workers compensation to their full liability • promotes the injury management and vocational rehabilitation of injured workers to help them successfully return to work • ensures all workers employed in a prescribed noisy workplace have the necessary hearing tests • provides a conciliation and review process to resolve disputed workers compensation matters • undertakes research and provides statistics in the areas of rehabilitation, injury prevention and noise-induced hearing loss.

2 Bedbrook Pl Tel: (08) 9388 5555 Shenton Park Toll free: 1300 794 744 Western Australia 6008 Fax: (08) 9388 5550 www.workcover.wa.gov.au Email: [email protected] Executive Director Mr A Warner Chairman Mr G Joyce

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Workplace Standards Tasmania Workplace Standards Tasmania is a division of the Department of Infrastructure, Energy and Resources and is responsible for administering much of the legislation that regulates business in Tasmania. Occupational health and safety and workers compensation, long service leave, shop trading hours, bank holidays and some occupational registrations are key areas. It also has responsibility for many industrial relations matters. An employer may obtain workers’ compensation insurance by choosing an insurance company licensed by Workplace Standards Tasmania.

Lower Level Tel: (03) 6233 7657 30 Gordons Hill Rd Toll free: 1300 366 322 Rosny Park Tasmania 7018 Fax: (03) 6233 8338 www.wst.tas.gov.au Email: [email protected] Director of Industry Safety Mr S Hyam

PricewaterhouseCoopers | 173 7.2 Industry associations

Association of Financial Advisers Ltd Originally formed as the Life Underwriters Association of Australia & New Zealand. The Association of Financial Advisers (AFA) provides training courses for the financial services industry. AFA training courses cover risk management (life and general insurance), superannuation, estate planning and investment planning. Level 26, 44 Market St Tel: (02) 9089 8700 New South Wales 2000 Fax: (02) 9089 8690 Email: [email protected] Tollfree: 1800 656 009

President (National) Mr D Bateman Treasurer (National) Mr M Hawes

Australasian Institute of Chartered Loss Adjusters The Australasian Institute of Chartered Loss Adjusters (AICLA) is the Australian and New Zealand organisation of professionals in the loss adjusting business. Its object is the elevation of standards in loss adjusting in Australia, NZ and South-East Asia. Loss adjustors must pass an examination to join the institute. AICLA runs a tiered examination system for loss adjusters, including a diploma in business loss adjusting, through the Australian and New Zealand Institute of Insurance and Finance.

GPO Box 1705 Tel: (07) 3229 6663 Brisbane Fax: (07) 3221 7267 Queensland 4001 Email: [email protected] www.aicla.org President Mr S Thorpe Secretary/Administrative Officer Mr T Libke

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Australasian Institute of Marine Surveyors The institute was formed in New South Wales and provides technical assistance to members who are qualified marine surveyors. It also provides information to members of the public who may seek the services of a marine surveyor.

PO Box 53 Email: [email protected] Berowra New South Wales 2081 www.aimsurveyors.com.au President Capt S C Beale Secretary/Treasurer Capt O A Castellino

Australian Friendly Societies Association The Australian Friendly Societies Association (AFSA) is the peak industry body for friendly societies and has some 100 members. It negotiates with government on behalf of members, maintains a professional statistical database, conducts training sessions and seminars, and advises members on compliance.

Lakeside Business Centre, Level 4, Tel: (03) 9685 7543 150 Albert Road South Melbourne Fax: (03) 9685 7599 Victoria 3205 Email: [email protected] www.afsa.com.au President Mr C Wright Executive Director Mr A Hodges

Australian Health Insurance Association Ltd The Australian Health Insurance Association (AHIA) is an industry association with 26 registered health fund members. These funds represent 94 per cent of the population covered by private health insurance. AHIA provides members with research and statistical services, including assistance with technical matters. It liaises with federal and state governments and other industry organisations, and provides media comment on behalf of the health insurance industry.

Unit 17G, Level 1 Tel: (02) 6202 1000 2 King St Fax: (02) 6202 1001 Deakin Email: [email protected] Australian Capital Territory 2600 www.ahia.org.au President Mr T Smith Chief Executive Officer The Honourable Dr Michael Armitage

PricewaterhouseCoopers | 175 Australian Health Service Alliance Ltd The Australian Health Service Alliance (AHSA) is a company that represents 24 of the 43 Registered Private Health Funds across Australia. It is responsible for facilitating arrangements between hospitals, doctors and health service providers on behalf of its member funds. Its services include: • arranging business partnership agreements for members with about 467 private hospitals and other health care providers • reviewing hospital services • development of episodic (case-mix) billing and payment models for purchasing health care services • development of medical-provider contracts with doctors • industry based research to add value to funds and their members • collecting, merging, verifying, auditing and dispatching Hospital Case-mix Protocol data for 24 health funds from about 467 hospitals. 979 Burke Rd Tel: (03) 9813 4088 Camberwell Fax: (03) 9813 4099 Victoria 3124 Email: [email protected] www.ahsa.com.au Chairman Mr V Tozer Chief Executive Officer Mr D King

Australian Insurance Law Association The Australian Insurance Law Association (AILA) is the Australian section of the International Association for Insurance Law (AIDA).AIDA was founded in the 1960s in Luxembourg and now has more than 55 national sections worldwide. The not-for-profit organisation aims to promote collaboration between industry officials and practising lawyers and academics by providing a forum for the review and development of insurance law through seminars, workshops and conferences.

38 Ellingworth Pde Tel: (03) 9899 5382 Box Hill Fax: (03) 9890 6310 Victoria 3128 Email: [email protected] www.aila.com.au President Mr C Rodd

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Australian & New Zealand Institute of Insurance and Finance The institute is the professional organisation in Australia, New Zealand and South-East Asia for persons engaged in insurance business and is concerned with education, training and professional development in all branches of insurance. The institute conducts direct examinations, mainly in insurance subjects, to educate and promote the career progression of insurance professionals. On completion, qualified persons may be elected as fellows, senior associates and members of the institute. It runs discussion groups and clubs throughout Australia and New Zealand. 600 Bourke St, Level 8 Tel: (03) 9613 7200 Melbourne Fax: (03) 9642 4166 Victoria 3000 Email: [email protected] www.theinstitute.com.au President Mr J Richardson Chief Executive Officer Ms D West

Finance Sector Union of Australia The Finance Sector Union of Australia (FSU) represents employees in the finance industry in Australia. It is committed to fostering members’ ambitions and protecting their rights and interests in accordance with the objectives of the union and relevant industrial laws. It advises and supports employees, and aims to ensure their needs are met. The FSU is a registered organisation under the Workplace Relations Act 1996 and is affiliated with the Australia Council of Trade Unions. It has branches in all states and national offices in Melbourne and Sydney. Full-time officials are elected for a four-year term by members.

4/341 Queen St Tel: 1300 366 378 Melbourne Victoria 3000 Fax: 1300 307 943 www.fsunion.org.au Email: [email protected] President Ms C Gordon National Secretary Mr P Schroder Sydney/ACT: Tel: 1300 366 378 Level 2, 321 Pitt St Fax: 1300 307 943 New South Wales 2000 Email: [email protected]

PricewaterhouseCoopers | 177 Financial Services Accountants Association Ltd The Financial Services Accountants Association (FSAA) was formed in 2000 from the merger of two industry accounting bodies, one involved with general insurance, the other with life insurance. The unified group aims to provide better service to its members, which include accountants and finance managers. Its services include training and development programs. Through the FSAA network, colleagues exchange ideas and keep abreast of developments in the industry. PO Box 141 Tel: (02) 9451 3223 Brookvale Business Centre Fax: (02) 9451 3234 New South Wales 2100 Email: [email protected] www.fsaa.com.au Federal President Mr R Sanzin Administrator Ms S Philp

Health Insurance Restricted Membership Association of Australia Inc The Health Insurance Restricted Membership Association of Australia (HIRMAA) is an association of 14 not-for-profit employee-based registered health insurance funds. It represents member funds in discussions with the Department of Health and PHIAC.

2/826 Whitehorse Rd Tel: (03) 9896 9370 Box Hill Fax: (03) 9896 9393 Victoria 3128 Email: [email protected] www.hirmaa.com.au Executive Director Mr R Wilson

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IBNA Ltd IBNA (formerly Insurance Brokers Network Australia Ltd) is a network of more than 80 accredited insurance brokers throughout Australia. Members provide products and services to IBNA shareholders, clients and underwriters.

Level 10 Tel: (02) 8913 1640 1 Elizzbeth Plaza Fax: (02) 9929 0451 North Sydney Email: [email protected] New South Wales, 2060 www.ibna.com.au Managing Director Mr G Watman Chief Executive Officer Mr P Sedgwick

Institute of Accident Assessors The institute is a professional body formed in New South Wales and provides technical assistance to members who are qualified automotive loss assessors in all states of Australia. 11-13 Byrne St Tel: (02) 9648 1412 Auburn Fax: (02) 9648 4241 New South Wales 2144 Email: [email protected] www.motorassessors.com.au President Mr P Marks

Institute of Actuaries of Australia The institute’s main objectives are to: • enhance the status of the actuarial profession in Australia • make representations to governments and other bodies on matters with actuarial implications • encourage the study of actuarial science • provide a forum for discussion of matters of interest to the profession.

Level 7, Challis House Tel: (02) 9233 3466 4 Martin Pl Fax: (02) 9233 3446 New South Wales 2000 Email: [email protected] www.actuaries.asn.au President Mr G Martin Chief Executive Officer Mr J Maroney

PricewaterhouseCoopers | 179 Institute of Public Insurance Assessors Inc The institute was formed in 1993 with the broad aims of promoting the profession of public-loss assessing, maintaining professional standards and widening consumer awareness of the service. Its objectives are: • to maintain an institute for members who act for policyholders in the preparation, negotiation and settlement of insurance claims • to ensure members maintain a professional standard of conduct and abide by the ethics of the institute • to provide a forum for co-operation and exchange of information among members and related organisations • to encourage and assist in the education of members, prospective members and related individuals and organisations • to ensure the public has access to the same claims-handling expertise as insurance companies • to promote the service to the public and relevant organisations. The institute has close ties with sister organisations in the UK (the Institute of Public Loss Assessors or IPLA) and the US (the National Association of Public Insurance Adjusters or NAPIA). 6 Boronia St , Suite 1 Tel: (02) 9437 3066 Wollstonecraft Fax: (02) 9437 3066 New South Wales 2065 Email: [email protected] President Mr M Arnold Administrator Ms L Caporn

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Insurance Advisers Association of Australia Inc The Insurance Advisers Association of Australia’s (IAAA) 220 members are insurance agents providing insurance sales, service and advice to consumers. IAAA encourages the professional development of members and has a Certified Professional Insurance Adviser (CPIA) program, requiring yearly training that allows a member to retain certification. PO Box 597 Tel: (03) 9390 9355 St Albans Fax: (03) 8390 7877 Victoria 3021 Email: [email protected] www.iaaa.com.au President Mr B Enever Chief Executive Officer Mr M Morgan

Insurance Council of Australia Ltd The Insurance Council of Australia (ICA) represents the interests of the general insurance industry. The Council was formed in 1975 and operates as an independent, not-for-profit organisation wholly owned by its members. The Council represents its members, handles issues and develops industry positions through government lobby, public affairs, industry forum, issues management and consumer services – all of which are backed up by technical and research resources. Head Office President Mr J F Mulcahy Executive Director Ms K Kelly 56 Pitt St , Level 3 Tel: (02) 9253 5100 Sydney Fax: (02) 9253 5111 New South Wales 2000 www.insurancecouncil.com.au

PricewaterhouseCoopers | 181 Insurance Premium Finance Association of Australia Ltd The association’s primary role is educational and concerned with self-regulation and dispute resolution. It provides legal advice and works to raise awareness of compliance issues among members. The premium funders are generally owned by the insurance industry and a large part of the funds are sourced from insurance companies. c/- KPMG Level 4 161 Collins St Melbourne Victoria 3000 President Mr T Priddle

Insurance Reference Services The Insurance Reference Services (IRS), Australia’s only national register of insurance claims, was established in 1991 and is owned and controlled by the insurance industry. It aims to help the industry fight fraud. The IRS provides a comprehensive and easily accessible source of insurance and commercial credit and public record information, and holds more than 18 million claims from all major classes of general insurance throughout Australia. IRS provides services to members through an agreement with Baycorp Advantage.

PO Box 966 Tel: 1300 762 207 North Sydney Toll free: 13 31 24 New South Wales 2059 Fax: (02) 9951 7880 irs.au.baycorpadvantage.com Email: [email protected]

Chairman Mr P Cooper Manager Mr M Walker

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Investment and Financial Services Association The Investment and Financial Services Association (IFSA) is a national not-for-profit association representing the investment and financial services sector. Its member companies provide managed investments, superannuation, life insurance and other financial services. IFSA represents members in dealings with governments, the media and the community. The Australian Retirement Income Streams Association merged with IFSA in 2002. IFSA’s mission is to play a role in the development of the social, economic and regulatory framework in which members operate, and help them to serve their customers better. IFSA works closely with legislators, regulators and other key shareholder groups to promote industry efficiency and ensure an effective and workable regulatory environment.

Suite 1, Level 24 Tel: (02) 9299 3022 44 Market St Fax: (02) 9299 3198 New South Wales 2000 Email: [email protected] www.ifsa.com.au Chairman Mr D Deverall Chief Executive Officer Mr R Gilbert

Medical Indemnity Insurers’ Association of Australia The Medical Indemnity Insurer’s Association of Australia (MIIAA) exists in order to: • Inform and influence the national dialogue, debate and policy setting on matters relating to the systems of medical risk management and compensation for medical harm. • Represent the voice of all insured doctors in such debates and policy setting. • Enhance the reputation of the member organisations as major contributors to the well being of the profession and the community. • Collaborate on the negotiation and implementation of government policy, legislation and regulation.

Santos House, Level 24 Tel: (08) 8113 5312 91 King William St Email: [email protected] Adelaide South Australia 5000 www.miiaa.com.au

President Ms M Anderson

PricewaterhouseCoopers | 183 National Insurance Brokers Association of Australia The National Insurance Brokers Association of Australia (NIBA) is an independent organisation of about 500 brokers representing the interests of members to the community, government and industry. Its services include technical and educational support for brokers. Initiatives for improvement of the industry include the Qualified Practising Insurance Broker (QPIB) program. QPIBs must meet rigid requirements in addition to those required for government registration. NIBA brokers abide by the general insurance brokers’ code of practice and subscribe to the Insurance Brokers Dispute Facility. 111 Pacific Hwy , Level 18 Tel: (02) 9964 9400 North Sydney Fax: (02) 9964 9332 New South Wales 2060 Email: [email protected] www.niba.com.au President Mr P Goddard Chief Executive Officer Mr N Pettersen

Risk Management Institute of Australaisia The Risk Management Institution of Australasia Ltd is a company limited by guarantee dedicated to advancing the discipline and practice of risk management. It was incorporated in 2003, following decisions by members of the Australasian Institute of Risk Management Limited (AIRM) and ARIMA Limited to merge to form a new organisation.

Po Box 97 Tel: (03) 8341 1000 Carlton South Fax: (03) 9347 5575 Victoria 3053 Email: [email protected] www.rmia.org.au President Mr G Whitehorn

184 | Insurance facts and figures 2008 Insurance directory | 7 7.3 Complaints review services

The role and responsibilities of each complaints review service are discussed in the sources of redress section of Chapter 3.

Financial Industry Complaints Service Ltd

P.O. Box 579 Tel: (03) 8623 2000 Collins Street West Toll free: 1300 780 808 Melbourne Fax: (03) 9621 2291 Victoria 8007 Email: [email protected] www.fics.asn.au Chairman Mr M Arnold Chair of the Panel Mr M Croyle Chief Executive Officer Ms A Maynard

Insurance Brokers Disputes Ltd 31 Queen Street, Level 5 Tel: (03) 9613 7366 Melbourne Toll free: 1300 780 808 Victoria 3000 Fax: (03) 9620 0166 www.ibdltd.com.au Email: [email protected] Chairman Mr R Smith Referee Mr D Letcher Compliance Manager Mr D Kirchlinde

Insurance Ombudsman Service

PO Box 561 Tel: (03) 9613 6300 Collins St Toll free: 1300 780 808 West Melbourne Fax: (03) 9621 2060 Victoria 8007 Email: [email protected] www.insuranceombudsman.com.au Chairman Mr P E Daly Insurance Ombudsman Mr S Parrino

PricewaterhouseCoopers | 185 Private Health Insurance Ombudsman

362 Kent Street, Level 7 Tel: (02) 8235 8777 Sydney Toll free: 1800 640 695 New South Wales 2000 Fax: (02) 8235 8778 www.phio.org.au Email: [email protected] Acting Ombudsman Ms S Gravel

186 | Insurance facts and figures 2008 Insurance directory | 7 7.4 Registered general insurers

ACE Insurance Ltd Australian Finance Group Tel: (02) 9335 3200 Tel: (02) 8908 3600 www.aceinsurance.com.au www.afgonline.com.au Asset Insure Pty Ltd Australian International Insurance Ltd Tel: (02) 9251 8055 Tel: 1800 240 432 www.assetinsure.com.au www.oamps.com.au Aioi Insurance Co Ltd Australian Unity General Insurance Ltd Tel: (02) 9278 4888 Tel: (03) 9697 0111 www.ioi-sonpo.co.jp/en/index.html www.australianunity.com.au Alea London Ltd AXA Insurance Australia Ltd Tel: (02) 9274 3000 Tel: 13 72 92 www.aleagroup.com www.axa.com.au Allianz Australia Insurance Ltd Barristers’ Sickness and Accident Fund Pty Ltd Tel: 13 26 44 Tel: (02) 9232 4055 www.allianz.com.au www.nswbar.asn.au American Home Assurance Co BHP Billiton Marine & General Insurances Pty Ltd Tel: (02) 9522 4000 Tel: (02) 9609 2686 www.aig.com.au www.bhpbilliton.com American International Assurance Co Boral Insurance Pty Ltd (Australia) Ltd Tel: (02) 9220 6300 Tel: 1800 333 613 www.boral.com.au www.aiaa.com.au Budget Direct Insurance Agency AMPG (1992) Ltd Tel: 1300 306 560 Tel: 13 12 67 Calliden Insurance Limited www.amp.com.au Tel: (02) 9551 1111 ANZcover Insurance Pty Ltd www.calliden.com.au Tel: 13 13 14 Catholic Church Insurances Ltd www.anz.com.au Tel: 1300 655 001 Ansvar Insurance Ltd www.ccinsurances.com.au Tel: 1300 650 540 Cavell Insurance Co Ltd www.ansvarinsurance.com.au Tel: (02) 900 7200 ANZ Lenders Mortgage Insurance Pty Ltd CGU Insurance Ltd Tel: (02) 9234 8111 Tel: 13 15 32 www.anz.com.au www.cgu.com.au Atradius Credit Insurance N.V. CGU-VACC Insurance Ltd Tel: (02) 9201 5222 Tel: 13 15 32 www.atradius.com/au www.cgu.com.au Avant Insurance Limited Chubb Insurance Co of Australia Ltd Tel: 1800 128 268 Tel: (02) 9273 0100 www.avant.org.au www.chubb.com Australian Alliance Insurance Co Ltd CIC Allianz Insurance Ltd Tel: 13 50 50 Tel: 13 26 64 www.apia.com.au www.allianz.com.au www.shannons.com.au www.abbi.com.au Combined Insurance Co of America Australian Associated Motor Insurers Ltd (trading as Combined Insurance Co of Australia) Tel: (03) 8520 1300 Tel: 1300 300 480 www.aami.com.au www.combined.com www.justcarinsurance.com.au Commonwealth Insurance Ltd Australian Family Assurance Limited Tel: 13 24 23 Tel: 1800 808 027 www.comminsure.com.au www.fcadirect.net Commonwealth Steamship Insurance Tel: (03) 8603 1000 Copenhagn Reinsurance Co Ltd (The) Tel: (02) 9247 7266

PricewaterhouseCoopers | 187 Registered general insurers

Corrvas Insurance Pty Ltd Hollard Insurance Co Pty Ltd (The) Tel: (03) 9270 7270 Tel: 1300 360 190 www.ansell.com.au www.hollard.com.au Credicorp Insurance Pty Ltd Hotel Employers Mutual Limited Tel: 13 32 82 Tel: (02) 8251 9069 www.cua.com.au www.hotelemployersmutual.com.au Cumis Insurance Society Inc (as a part of the Cuna Hotline Insurance Co Pty Ltd Mutual Group) Tel: (07) 3377 8801 or 1800 095 000 Tel: (02) 9295 5555 www.budgetdirect.com.au www.cumis.com HSB Engineering Insurance Ltd Curasalus Insurance Pty Ltd Tel: 1300 739 472 (formerly known as Orica Insurance Pty Ltd) www.hsbaustralia.com Tel: (03) 9665 7111 IAG Re Australia Limited www.orica.com.au Tel: (02) 9292 9222 Elders Insurance Ltd www.iag.com.au Tel: (02) 8251 9000 Insurance Australia Ltd www.insurance.elders.com.au Tel: (02) 9292 9222 Employers Mutual Ltd www.iag.com.au Tel: (02) 8251 9000 Insurance Manufacturers of Australia Pty Ltd www.emia.com.au Tel: 13 21 32 Employers Reinsurance Corporation www.nrma.com.au Level 34, 60 Margaret St, Sydney 2000 www.racv.com.au Tel: (02) 9394 2800 ING General Insurance Pty Ltd www.swissre.com Tel: 1800 815 688 Farmers’ Mutual Insurance Ltd www.ing.com.au Tel: (02) 6041 2611 Kemper Insurance Co Ltd www.fmginsurance.com.au 95 Harrington St, Sydney 2000 First American Title Insurance Co of Australia Pty Ltd LawCover Insurance Pty Ltd Tel: (02) 8235 4433 Tel: (02) 9264 8855 www.firsttitle.com.au www.lawcover.com.au FM Insurance Co Ltd Liberty Mutual Insurance Co Tel: (02) 8273 1400 (Trading as Liberty Internaional Underwriters) www.fmglobal.com Tel: (02) 8298 5800 Fortron Insurance Group Ltd www.liuaustralia.com.au Tel: (08) 9202 5300 Lionheart Insurance Pty Ltd www.fortron.com.au Tel: (08) 9472 9700 General ReInsurance Australia Ltd Lumley General Insurance Ltd Tel: (02) 8236 6100 Tel: (02) 9248 1111 www.genre.com www.lumley.com.au GIO General Ltd Master Butchers Co-operative Ltd Tel: 13 10 10 Tel: (08) 8262 5433 www.gio.com.au MDA National Insurance Pty Ltd Gordian Runoff Ltd Tel: (02) 9023 3300 Tel: (02) 9257 5472 www.mdanational.com.au Guild Insurance Ltd MDU Australia Insurance Co Pty Ltd Tel: 1800 810 213 Tel: (02) 9260 9000 www.guildifs.com.au www.unitedmp.com.au Hallmark General Insurance Co Ltd Medical Insurance Australia Pty Ltd Tel: (02) 9324 7999 Tel: (08) 8238 4444 www.gemoney.com.au www.miga.com.au Hannover Reinsurance Metway Insurance Ltd Tel: (02) 9274 3000 (07) 3362 1222 www.hannover-re.com www.suncorp.com.au HBF Insurance Pty Ltd Tel: (08) 9265 6111 or 133 423 www.hbf.com.au

188 | Insurance facts and figures 2008 Insurance directory | 7 Registered general insurers

MIPS Insurance Pty Ltd PMI Mortgage Insurance Ltd (Formerly Health Professionals Insurance Australia Pty Ltd) Tel: (02) 9231 7777 Tel (03) 8620 8828 www.pmigroup.com.au www.mips.com.au Poseidon Insurance Company Pty Ltd MMIA Pty Ltd 4 Bligh Street, Sydney 2000 Tel: (02) 9955 3999 QBE Insurance (Australia) Limited Mortgage Guaranty Insurance Corporation Australia Tel: (02) 9375 4444 Pty Ltd www.qbe.com Tel: 1800 466 442 QBE Insurance (International) Limited www.mgic.com.au Tel: (02) 9375 4444 Mortgage Insurance Co Pty Ltd (The) www.qbe.com Tel: (02) 9255 4100 RAA Insurance Ltd www.allco.com.au Tel: (08) 8202 4600 Mortgage Risk Management Pty Ltd www.raa.net (07) 4153 7714 RAC Insurance Pty Ltd www.widebaycap.com.au Tel: (08) 9421 4444 MTA Insurance Ltd www.rac.com.au (Formerly MTQ Insurance Ltd) RACT Insurance Pty Ltd Tel: (07) 3392 136 Tel: (03) 6232 6300 www.mta.com.au www.ract.com.au Mutual Community General Insurance Pty Ltd RACQ Insurance Ltd Tel: (03) 9601 8222 Tel: 13 19 05 www.cgu.com.au/mcgi www.racq.com.au Munich Reinsurance Company Australia Branch SCOR Reinsurance Asia Pacific Pte Ltd Tel: (02) 9272 8000 Tel: (02) 9274 3000 www.munichre.com www.scor.com Munich Reinsurance Co of Australasia Ltd Sphere Drake Insurance Ltd Tel: (02) 9272 8000 (02) 9299 9900 www.munichre.com St Andrew’s Insurance (Australia) Pty Ltd Municipal Mutual Insurance Ltd Tel: (02) 8299 8080 Tel: (03) 9642 3511 www.standrewsaus.com.au New India Assurance Co Ltd (The) StateCover Mutual Ltd Tel: (02) 9241 3388 Tel: (02) 8270 6000 NipponKoa Insurance Co Ltd www.statecover.com.au Tel: (02) 8224 4194 Stewart Title Ltd www.nipponkoa.co.jp/english Tel: (02) 9081 6200 North Insurances Pty Ltd www.stewart.com Tel: (03) 9283 3333 Suncorp Metway Insurance Limited www.reotinito.com Tel: 13 11 55 NRG London Reinsurance Co Ltd www.suncorp.com.au Tel: (02) 9274 3000 Sunstate Lenders Mortgage Insurance Pty Ltd NRG Victory Australia Ltd Tel: (07) 3362 1222 Tel: (02) 9274 3000 www.suncorp.com.au Optus Insurance Services Pty Ltd Sompo Japan Insurance Inc Tel: (02) 9342 7800 Tel: (02) 9390 6273 www.optus.com.au www.sompo-japan.com/english OUTsurance Australia Insurance Company Pty Ltd Sunderland Marine Mutual Insurance Co Ltd Tel: (07) 5430 3900 Tel: (03) 9650 6288 Permanent LMI Pty Ltd www.smmi.co.uk Tel: (02) 9231 7777 Swann Insurance (Australia) Pty Ltd www.pmigroup.com.au Tel: 1300 850 574 PMI Indemnity Ltd www.cgu.com.au/swann Tel: (02) 9231 7777 Swiss Reinsurance Company www.pmigroup.com.au Tel: (02) 8295 9500 www.swissre.com

PricewaterhouseCoopers | 189 Registered general insurers

Taxi Insurance Co-operative Ltd Authorised non-operating holding companies Tel: (08) 9321 6423 ACE Australia Holdings Pty Ltd TGI Australia Ltd Tel: (02) 9335 3200 Tel: 13 38 88 www.aceinsurance.com.au www.amp.com.au Allianz Australia Ltd Tokio Marine & Nichido Fire Insurance Co Ltd (The) Tel: 13 10 00 Tel: (02) 9232 2833 www.allianz.com.au Tower Insurance Ltd AMP Ltd Tel: +64 9 369 2000 Tel: (02) 9257 5000 www.towerlimited.com www.amp.com.au Transatlantic Reinsurance Co Asset Insure Holdings Pty Ltd Tel; (02) 9274 3061 Tel: (02) 9251 8055 www.transre.com www.assetinsure.com.au Vero Insurance Ltd Calliden Group Limited Tel: 13 18 13 Tel: (02) 9551 1111 www.vero.com.au www.calliden.com.au Virginia Surety Company INC Genworth Financial Mortgage Insurance Holdings Pty Ltd Tel: (03) 9211 3000 (formerly GE Mortgage) www.aon.com Tel: 1300 655 422 Wesfarmers Federation Insurance Ltd www.genworth.com.au Tel: (08) 9273 5333 HBOS Australia Pty Ltd www.wfi.com.au Tel: (02) 8299 8000 Westpac General Insurance Ltd www.hbosaustralia.com.au Tel: 1300 369 876 Insurance Australia Group Ltd www.westpac.com.au Tel: (02) 9292 9222 Westpac Lenders Mortgage Insurance Ltd www.iag.com.au Tel: (02) 9260 7379 Lumley Corporation Pty Ltd www.westpac.com.au Tel: (02) 9248 1111 XL Insurance Co Ltd www.lumley.com.au Tel: (02) 8270 1400 MGIC Australia Pty Ltd www.xlinsurance.com Tel: 1800 466 442 XL Re Ltd www.mgic.com.au Tel: (02) 8270 1400 PMI Mortgage Insurance Australia (Holdings) Pty Ltd www.xlre.com Tel: (02) 9231 7777 Zurich Australian Insurance Ltd www.pmigroup.com.au Tel: (02) 9995 1111 Promina Group Ltd www.zurich.com.au www.suncorp.com.au QBE Insurance Group Ltd Tel: (02) 9375 4444 www.qbe.com Zurich Financial Services Australia Ltd Tel: (02) 9995 1111 www.zurich.com.au

190 | Insurance facts and figures 2008 Insurance directory | 7 7.5 Registered life insurers

Allianz Australia Life Insurance Limited Metlife Insurance Ltd Tel: 13 10 00 Tel: 1300 555 625 www.allianz.com.au www.metlife.com.au American International Assurance Co (Australia) Ltd MLC Ltd Tel: 1800 333 613 Tel: 13 37 71 www.aiaa.com.au www.mlc.com.au AMP Life Ltd MLC Lifetime Co Ltd Tel: 13 38 88 Tel: 13 26 52 www.amp.com.au www.mlc.com.au Asteron Life Limited Munich Reinsurance Co of Australasia Ltd Tel: (02) 8275 3500 Tel: (02) 9272 8000 www.asteron.com.au www.munichre.com BT Life Ltd National Australia Financial Management Ltd Tel: 13 21 35 www.nab.com.au www.btonline.com.au National Mutual Life Association of Australasia Ltd Challenger Life No 2 Ltd (trading as AXA) Tel: (02) 9994 7000 Tel: (03) 9287 3333 www.challenger.com.au www.axa.com.au Colonial Mutual Life Assurance Society Ltd (The) Norwich Union Life Australia Ltd (Trading as CommInsure) (Trading as Aviva) Tel: 13 10 56 Tel: 1800 626 100 www.comminsure.com.au www.avivagroup.com.au Combined Life Insurance Co of Australia Ltd RGA Reinsurance Co of Australia Ltd Tel: 1300 300 480 Tel: (02) 8264 5800 www.combined.com www.rgare.com Cuna Mutual Life Australia Ltd St Andrews Life Insurance Pty Ltd Tel: (02) 9295 5555 Tel: 1300 363 159 www.cunamutual.com.au www.standrewsaus.com.au General Reinsurance Life Australia Ltd St George Life Ltd Tel: (02) 8236 6100 Tel: 13 33 30 www.genre.com www.stgeorge.com.au Gerling Australia Insurance Co Pty Ltd Suncorp Life & Superannuation Ltd Tel: (02) 8274 4200 Tel: 13 11 55 www.gerling.com www.suncorp.com.au Hallmark Life Insurance Co Ltd Swiss Re Life & Health Australia Ltd Tel: (02) 9324 7999 Tel: (02) 8295 9500 www.gemoney.com.au www.swissre.com Hannover Life Re of Australasia Ltd Tower Australia Ltd Tel: (02) 9251 6911 Tel: (02) 9448 9000 www.hannoverlifere.com www.toweraustralia.com.au HCF Life Insurance Co Pty Ltd Westpac Life Insurance Services Ltd Tel: 13 13 34 Tel: 1300 130 272 www.hcf.com.au www.westpac.com.au ING Life Ltd Zurich Australia Ltd Tel: (02) 9234 8111 Tel: 132 687 www.ing.com.au www.zurich.com.au IOOF Life Ltd Tel: 13 13 69 www.ioof.com.au Macquarie Life Ltd Tel: 1800 005 057 www.macquarie.com.au MBF Life Ltd Tel: 13 26 23 www.mbf.com.au

PricewaterhouseCoopers | 191 7.6 Registered health insurers

ACA Health Benefits Fund (R) Lysaght Peoplecare Ltd (R) Tel: (02) 9847 3390 Tel: (02) 4224 4333 www.acahealth.com.au www.peoplecare.com.au Acorn Prudential Manchester Unity Australia Ltd Tel: (02) 9267 9141 Tel: 13 13 72 www.druidsnsw.com.au www.manchesterunity.com.au Australian Health Management Group Ltd MBF Australia Ltd Tel: 134 246 Tel: 1300 653 525 www.ahm.com.au www.mbf.com.au Australian Unity Health Ltd MBF Alliances Pty Ltd Tel: 13 29 39 Tel: 13 32 34 www.australianunity.com.au www.mbf.com.au BUPA Australia Health Pty Ltd Medibank Private Ltd (trading as HBA & Mutual Community) Tel: 13 23 31 Tel: 131 243 www.medibank.com.au www.hba.com.au Mildura District Hospital Fund Ltd CBHS Friendly Society Ltd (R) Tel: (03) 5021 7099 Tel: 1300 654 123 Navy Health Ltd (R) www.cbhs.com.au Tel: (03) 9896 9300 Cessnock District Health Benefits Fund Ltd www.navyhealth.com.au Tel: (02) 4990 1385 NIB Health Funds Ltd www.cdhbf.com.au Tel: (02) 4926 9601 Credicare Health Fund Ltd www.nib.com.au Tel: 13 32 82 Phoenix Health Fund Ltd (R) www.cua.com.au Tel: (02) 4935 5738 or 1800 028 817 Defence Health Ltd (R) www.phoenixhealthfund.com.au Tel: (03) 9291 1000 Queensland Country Health Ltd www.defencehealth.com.au Tel: 1800 813 415 Federation Health Ltd www.health.gccu.com.au Tel: 1300 362 144 Queensland Teachers’ UnionHealth Fund Ltd (R) www.latrobehealth.com.au Tel: (07) 3259 5821 GMHBA Ltd www.tuh.com.au Tel: (03) 5224 8771 Railway & Transport Health Fund Ltd (R) www.gmhba.com.au Tel: 1300 886 123 Goldfields Medical Fund Inc www.rthealthfund.com.au Tel: 1300 653 099 Reserve Bank Health Society Ltd (R) www.gmfhealth.com.au Tel: (02) 9551 9035 HBF Health Funds Inc South Australian Police Employees Health Tel: 13 34 23 Fund Inc (R) www.hbf.com.au Tel: (08) 8212 2770 Health Care Insurance Ltd (R) www.policehealth.com.au Tel: 1800 804 950 St. Lukes Health www.hciltd.com.au Tel: 1300 651 988 Health Insurance Fund of Western Australia Inc www.stlukes.com.au Tel: 1300 134 060 Teachers’ Federation Health Ltd (R) www.hif.com.au Tel: 1300 728 188 Health-Partners Inc www.teachershealth.com.au Tel: 1300 133 133 Teachers' Union Health www.healthpartners.com.au Tel: (07) 3259 5821 Hospitals Contribution Fund of Australia Ltd (The) www.tuh.com.au Tel: 13 13 34 Transport Health Pty Ltd (R) www.hcf.com.au Tel: (03) 8420 1888 Latrobe Health Services Inc www.transporthealth.com.au Tel: 1300 362 144 United Ancient Order of Druids Friendly Society Ltd www.latrobehealth.com.au Tel: (03) 9329 5144 www.druids.com.au

192 | Insurance facts and figures 2008 Insurance directory | 7 7.7 Government insurers

Westfund Ltd NSW WorkCover Authority Tel: 1300 552 132 Type: Workers www.westfund.com.au Tel: (02) 4321 5000 ACT Insurance Authority www.workcover.nsw.gov.au Type: Self Group: NSW Govt Tel: (02) 6207 0184 South Australian Government Captive Insurance www.treasury.act.gov.au/actia/ Corporation (SAICORP) Group: ACT Govt Type: Self Australian Reinsurance Pool Corporation Tel: (08) 8226 9500 Type: Reinsurer www.treasury.sa.gov.au Tel: (02) 8223 6777 Group: SA Govt www.arpc.gov.au Territory Insurance Office (NT) Group: Cwlth Govt Type: General Comcare Tel: 1300 301 833 Type: Self www.tiofi.com.au Tel: 1300 366 979 Group: NT Govt www.comcare.gov.au Transport Accident Commission (Vic) Group: Cwlth Govt Type: CTP Comcover Member Services Tel: 1300 654 329 Type: Self www.tac.vic.gov.au Tel: (02) 6215 2222 Group: Vic Govt www.comcover.com.au Victorian Managed Insurance Authority Group: Cwlth Govt Type: Self Defence Service Homes Insurance Scheme Tel: (03) 9270 6900 Type: Self www.vmia.vic.gov.au Tel: 1300 552 662 Group: Vic Govt www.dsh.gov.au Victorian WorkCover Authority Group: Cwlth Govt Type: Workers Export Finance & Insurance Corporation Tel: (03) 9641 1444 Type: Export www.workcover.vic.gov.au Tel: (02) 9201 2111 Group: Vic Govt www.efic.gov.au WorkCover Corporation (SA) Group: Cwlth Govt Type: Workers Insurance Commission of WA Tel: 13 18 55 Type: CTP / Self www.workcover.com Tel: (08) 9264 3333 Group: SA Govt www.icwa.wa.gov.au WorkCover Queensland Group: WA Govt Type: Workers Motor Accident Commission (SA) Tel: 1300 362 128 Type: CTP www.workcover.qld.gov.au Tel: (08) 8221 6377 Group: Qld Govt www.mac.sa.gov.au Group: SA Govt Motor Accidents Insurance Board (Tas) Type: CTP Tel: 1800 006 224 www.maib.tas.gov.au Group: Tas Govt NSW Self Insurance Corporation (Formerly NSW Insurance Ministerial Corporation) Type: Self Tel: (02) 9228 3829 Group: NSW Govt

PricewaterhouseCoopers | 193 7.8 PwC Australian offices and industry experts

Australian Insurance Leader Melbourne Kim Smith 2 Southbank Boulevard Tel: (03) 8603 1000 Sydney Fax: (03) 8613 5555 201 Sussex Street Tel: (02) 8266 0000 Assurance Fax: (02) 8266 9999 Andrew McPhail Dale McKee David Coogan Assurance Galina Kraeva Billy Bennett Simon Gray Damian Hollingsworth Ian Hammond Julian Williams Corporate Finance and Recovery Joanne Gorton Greg Keys Pat Murray James Garde Peter Merrett Richard Deutsch Rod Balding Risk Management Scott Fergusson Mike Bridge Scott Hadfield Voula Papageorgiou Tax Actuarial Jeff May Mark Laurie Chris Latham Christa Marjoribanks Conor O’Dowd Brisbane Daniel Tess 1 Eagle Street Jason Slade Tel: (07) 3257 5000 John Walsh Fax: (07) 3257 5999 Lisa Simpson Michael Playford Noeline Woof Assurance Tim Jenkins Andrew Weeden Tim Allman Corporate Finance David Denny Perth Stuart Goddard 250 St George’s Terrace Tel: (08) 9238 3000 Transaction Services Fax: (08) 9238 3999 Charles Humphrey Sean Gregory Assurance Nick Henry Risk Management Cassandra Michie Actuarial Jan Muysken Nigel Ampherlaw Peter Lurie Richard Mirabello Robin Low Adelaide 91 King William Street Tax Tel: (08) 8218 7000 Brian Lawrence Fax: (08) 8218 7999 John Masters Ken Woo Manuel Makas Assurance Neil Wilson Derek Clark Peter Kennedy Tax Jim McMillan

194 | Insurance facts and figures 2008

2008 facts

figures Insurance and

PricewaterhouseCoopers Insurance facts and figures 2008 pwc.com/au