Life Insurance Regulation

Regulation of the Australian Life Insurance Industry

Key Facts

  • ASIC and APRA are the two main regulatory bodies in Australia..
  • Each applicant is bound to their duty of disclosure during live cover policy application.

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The Australian Life Insurance Industry is by and large regulated by two principal regulators; The Australian Securities and Investment Commission (ASIC) and The Australian Prudential Regulation Authority (APRA). Both of these two authorities are responsible for protecting the rights of both consumers and businesses.

The Role of ASIC

ASIC is an independent government body concerned with regulating company and financial services laws to ensure consumers, investors and creditors are protected by upholding market integrity and adviser conduct.

ASIC’s chief priorities include;

  • Ensuring financial markets are both fair and efficient
  • This is maintained through strict supervision and governance of corporations
  • Ensuring appropriate licensing and registration is in place
  • Ensure investors and consumers are able to be confident and informed in their decisions
  • Educating investors to help them make smart investment decisions through an understanding of risk and reward
  • Holding gatekeepers to account
  • Understanding decisions made by both investors and consumers

Legislation Administered by ASIC

  • ASIC Act 2001
  • Corporations Act 2001: Sets out legislation dealing with business entities within Australia at both a federal and interstate level. Principal legislation regulating Australian companies.
  • Insurance Contracts Act 1984: Regulation of insurance contracts to ensure fairness between insurers, insureds and other members of public to maintain fairness in provisions of insurance contracts and in the practice of insurers dealing in such contracts.
  • Superannuation Act 1993: Lays out all legislation that must be obeyed by superannuation funds.

The Role of APRA

APRA supervises and regulates the prudential practices of banks, credit unions, friendly societies, life insurance companies, and some superannuation arrangements who are entitled to manage the public's funds. APRA looks to design and enforce good management standards and practices through integrity, collaboration, professionalism, foresight and accountability.

Legislation Administered by APRA

  • Banking Act 1995: Regulates Banking, making provision for Protection of the Currency of The Public Credit of the Commonwealth.
  • Life Insurance Act 1995: Lays out legislation regulating financial services dealing with life insurance.
  • Insurance Contracts Act 1984: Lays out legislation to ensure fairness in interests of insureds, insurers and other members of the public in the provision of insurance contracts.
  • General Insurance Reform Act 2001: Makes Amendments to the Insurance Act of 1973 through the introduction of new prudential standards for capital adequacy, liability valuation, reinsurance and operational risk.
  • Superannuation Industry Act 1993: Lays out legislation that must be adhered to by superannuation fund. Provides legislation relating to trustee, investments, enquiries, fund management, accounts and administration.

The Regulation of Different Life Insurance Companies

Supervision of life insurance companies was transferred from state governments to the Commonwealth governments in the 1930s. The Life Insurance Act of 1945 laid out the main legislation to be followed by life insurers. In 1995 this Act was embedded with the Contemporary Act.

Life Insurance Act 1995

The Life Insurance Act of 1995 Ensures

  • Insurers provide policyholders with benefit payments in the event of a claim.
  • Insurers carry out business in dealing life insurance contracts in an appropriate manner.
  • Regulates the actual sale of Life Insurance.

Insurance Contracts Act of 1984

This act looks to protect insurers, insured and other members of the public by ensuring the transaction of insurance contracts is conducted fairly. The act ensures that provisions of contracts and the practices of insurers providing the cover is done fairly. An underlying doctrine fundamental to insurance contracts is that of “Utmost Good Faith” whereby;

      • Both parties operate fairly and are open and honest with each other about the risk that is to be insured.

Insured’s Duty of Disclosure

Before entering into an insurance contract, the applicant has a duty to disclose to the insurer, every matter that may be relevant to the insurers decision on whether or not to accept the risk that the insured poses to them.

The applicant is not required to disclose information that;

  • Reduces the risk of being covered
  • Is common knowledge
  • That the insurer would be expected to know
  • Compliance with the duty of disclosure is waived by the insurer

It is the responsibility of the insurance provider to inform the insured about their duty of disclosure. Failure to do so will leave the insurer powerless in the event that they dispute a claim they deem to be false.

Non Disclosure in the Duty of Disclosure

Events where the insured will not be charged with misrepresentation:

  • In the event that the insured makes an untrue statement when they in fact thought they were telling the truth, they will not held accountable for falsifying their duty of disclosure.
  • Failure to answer questions.
  • Answers to ambiguous questions.

Life Insurance Companies and Fraud

  • Protection is given to life insurance companies in finding misrepresentation of applicants for a period of three years.
  • In the event that a false claim is made within these three years, the life insurer is able to adjust the sum-insured to reflect how they would have been had the previous facts been known to the insurer.
  • After this three year period, the insurer must be able to prove fraud in regard to the insureds application for insurance. In that event the benefit payment can either be reduced or become void.

Cancellation of Policies

While the Act seeks to give protection to the policyholder by placing restrictions around when a policy can be cancelled, there are times during an insurance contract it can be cancelled by an insurer;

  • If the insured fails to act with good faith.
  • If the insured fails to comply with the duty of disclosure.
  • Commits fraud during negotiation but before contact was entered.
  • The insured makes a fraudulent claim.

Renewal of Life Cover Policies

Insurers are required to advise the policyholder 14 days prior to the policy renewal date that their policy is up for renewal and under what terms it may be renewed. If the insurance company fails to give this notice, the insurance contract may be renewed under the same conditions at which it was originally entered.

Life Insurance Act of 1995

The Life Insurance Act of 1995 looks to protect the interests of both policyholders and potential applicants of life insurance policies while ensuring the insurance industry remains competitive and innovative.

Key Objectives of the Life Insurance Act

  • Restrict the sale of life insurance to companies that are both suitable and meet the eligibility requirements of sale.
  • Place controls over the requirement of life insurance companies to ensure prudent management of life insurance business.
  • Enable supervision of Life Insurance companies by both APRA and ASIC.
  • Provide legislative management of life insurance companies that may not show signs of strength i.e. poor management or dwindling financial position.
  • Make provisions to ensure that if a life insurance company is closing down, policyholders are protected from any loss.
  • Enables supervision of the transfer and amalgamation of life companies.

Registration of Life Insurance Companies

There are a number of requirements outlined in the ACT that life companies must abide by before ASIC/APRA will grant registration. These include;

  • Life company must maintain outside the statutory fund a minimum of $10 million.
  • For those companies limited to shares, that capital may be made up by ordinary shares or redeemable preference shares.
  • Company must have at least additional $5 million of eligible assets.

Failure to meet the above requirements will result in the life company being refused registration.

Regulation of Statutory Funds

The Act lays out strict regulation around the requirements of life insurance companies in their handling of statutory funds.

  • All amounts received by a life company must be credited to the business of said fund.
  • A businesses assets and investments must be included within the fund.
  • All liabilities of the business, must be treated as liabilities of the fund.
  • Assets must only be made available for expenditure according to the conduct of the fund.
  • Statutory funds may not be restructured or cancelled in any way without approval from APRA.
  • Profits and Losses of statutory fund must be dealt with in manner that protects policyholders and is consistent with prudential guidelines for fund management.

Statutory Fund Requirements for Life Companies

  • Life company must have at least one statutory fund at all times.
  • Companies carrying life insurance for business with investment-linked benefits must maintain statutory funds exclusively for that business.
  • Life company that performs life insurance business outside of Australia must have exclusive fund/funds for those businesses.

Solvency and Capital Adequacy

The Act outlines some key standards around solvency and capital adequacy that must be adhered to by the insurance company.

Section  Regulation

Section 66Solvency standard. Life Insurance company must at any time be able to meet all policy liabilities referable to the fund.
Section 67Every company must ensure they comply with the solvency standard.
Section 68Life company must adhere to specific directions that are given to it.
Section 71Life company must have sufficient capital to conduct business in fund.
Section 72Every life company must ensure they comply with capital adequacy standard.
Section 97Protects the power of the appointed actuary. An actuary must be provided with the necessary powers for them to perform their role.
Section 116Governs the advice provided by actuaries around life policies i.e. there must be terms and conditions on policies issued, basis for surrender value of policies must be determined, proposed value of benefits must be determined.

Appointment of Judicial Manager

In the event that APRA deems the policyholders funds may be in jeopardy, a judicial manager may be appointed to take action to ensure that the company continues to function and the policyholders can receive a benefit payment when needed.

In order for a judicial manager to be appointed, a company must have met the following criteria;

  • Failed to comply with directions specified in section 68 of the Act.
  • Company is believed to be in an unsatisfactory financial position or poorly managed.
  • Time taken to complete full investigation of company would be prejudice to the interests of the companies policyholders.

In the event that a company is forced to close, section 187 of the Act specifies the treatment of statutory fund assets.

Transfer and Amalgamation of Life Companies

Act provides regulator with power to either accept or reject amalgamations from life insurance companies. Under this act the regulator attempts to ensure that neither party suffers a loss from the amalgamation. Under the act life insurance business of one company can not be transferred to another company or amalgamated with the business of another company unless if it has been approved under a scheme by the court.

Importance of Understanding Industry Regulation for Consumers

It is important for consumers to have an understanding of how the life insurance industry is regulated to ensure they do not suffer any loss throughout the term of their policy. Knowledge of the standards that insurance companies must adhere to and of the regulators that govern the industry will ensure they take the right action in addressing any issue with their policy.

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