Australia
Insurance Core Principles—Detailed Assessment of Observance

The insurance industry in Australia has weathered the global financial crisis well and was resilient to the catastrophic events in 2010/11. The insurance industry is mature but relatively small compared to the banking sector. Assets held by insurers represented only about 8 percent of the financial system total assets as at end-2011. Since 2007, the insurance market has been consolidating steadily as the total number of players fell from 190 to 172 although branches of foreign-owned general insurers rose from 36 to 43. The industry was comprised of 24 life insurers, 108 general insurers, 19 reinsurers, 7 captive general insurers and 14 friendly societies as at end-June 2011.

Abstract

The insurance industry in Australia has weathered the global financial crisis well and was resilient to the catastrophic events in 2010/11. The insurance industry is mature but relatively small compared to the banking sector. Assets held by insurers represented only about 8 percent of the financial system total assets as at end-2011. Since 2007, the insurance market has been consolidating steadily as the total number of players fell from 190 to 172 although branches of foreign-owned general insurers rose from 36 to 43. The industry was comprised of 24 life insurers, 108 general insurers, 19 reinsurers, 7 captive general insurers and 14 friendly societies as at end-June 2011.

I. Assessment of Insurance Core Principles

A. Introduction and Scope

1. This assessment provides an update on the significant regulatory and supervisory developments in the insurance sector of Australia since 2006. The current assessment was conducted by Michael Hafeman (external expert engaged by the IMF) and Su Hoong Chang (Senior Financial Sector Expert, International Monetary Fund (IMF)) from April 30 – May 15, 2012. Australia undertook an initial Financial Sector Assessment Program (FSAP) in 2006, which included a formal assessment of its observance with the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in 2003. The Financial Stability Board has conducted a peer review of the authorities’ implementation the recommendations arising from the 2006 assessment and issued its report in September 2011.

2. The current assessment is benchmarked against the ICPs issued by the IAIS in October 2011. The ICPs apply to all insurers, whether private or government-controlled. Specific principles apply to the supervision of intermediaries. The ICPs are presented according to a hierarchy of supervisory material:

  • a) ICP statements prescribe the essential elements that must be met in order to achieve observance;

  • b) Standards are linked to specific ICP statements and set out the key high level requirements that are fundamental to the implementation of the ICP statement; and

  • c) Guidance material provides detail on how to implement an ICP statement or standard.

B. Information and Methodology Used for Assessment

3. The level of observance for each ICP reflects the assessments of its standards.

Each ICP is rated in terms of the level of observance as follows:

  • 1. Observed: where all the standards are observed except for those that are considered not applicable. For a standard to be considered observed, the supervisor must have the legal authority to perform its tasks and exercise this authority to a satisfactory level.

  • 2. Largely observed: where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.

  • 3. Partly observed: where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.

  • 4. Not observed: where no substantive progress toward observance has been achieved.

4. The assessment is based solely on the laws, regulations and other supervisory requirements and practices that are in place at the time of the assessment. Ongoing regulatory initiatives are noted by way of additional comments, e.g., proposed Level 3 supervision of financial conglomerates and the Life and General Insurance Capital Review (LAGIC). A comprehensive self-assessment and other pertinent information (reports, studies, consultation papers, public statements, directives, etc.) provided by the authorities facilitated a meaningful assessment. The assessors also benefitted from the valuable inputs and insightful views from meetings with insurers, industry and professional organizations, as well as representatives of the Private Health Insurance Administration Council and the Motor Accidents Authority of New South Wales, which are responsible for overseeing specific segments of the insurance market.

5. The assessors are grateful to the authorities for the full cooperation, thoughtful logistical arrangements, including the helpful co-coordination of various meetings with industry participants. Technical discussions with and briefings by officials from APRA and ASIC have enriched the analysis in this report.

C. Overview—Institutional and Macro Prudential Setting

Market Structure and Industry Performance

6. The insurance industry in Australia is relatively small in asset size compared to the banking sector. Life and general insurance accounted for a small share of total financial system assets (Table 1). In contrast, authorized deposit-taking institutions (ADIs)1 represented nearly 60 percent of total financial system assets, with the four dominant banks2 representing about 75 percent of total ADI assets.

Table 1.

Insurance Industry’s Share of Total Financial Sector Assets

(in A$ billions)

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Source: APRA.

7. The penetration and density of the Australian insurance market are generally lower compared to other industrialized economies (Table 2). The insurance penetration ratios for both life and general insurance were less than 3 percent compared to the averages (as at end-2010) recorded by industrialized countries of 5.1 percent and 3.8 percent, respectively. Similarly, the premiums density of Australia is lower than the average for industrialized countries of US$ 2,069. However, the insurance density achieved by Australian general insurers was higher than the average for industrialized countries (US$ 1,458).4 Feedback from industry suggested under-insurance of Australians in both life and general insurance, due at least partly to the implications of high premium taxes in some states and the fact that Australian life insurers write very little savings and investment business, apart from superannuation business.

Table 2.

Insurance Penetration and Density as at 30 June 2011

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Source: APRA

8. After two decades of consolidation, the number of insurers has remained relatively stable over the period since 2006 (Table 3). The number of captive insurers remained small. With the introduction of the insurance-group supervision framework (termed as Level 2 supervision) in 2009, there were 19 authorized general insurance groups as at end-June 2011. Level 2 supervision does not apply to life insurers. Notably, more foreign general insurers are tapping into the Australian market, as indicated by the increase in the foreign branches from 36 to 43, and a few new entrants obtained authorization in response to the change in the previous Direct Offshore Foreign Insurers (DOFI) regime.5 There are no foreign life insurance branches in Australia.

Table 3.

Trend in Insurance Market Structure

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Source: APRA

9. The majority of insurers are Australian owned (Table 4). Of the 108 direct general insurers, 97 were owned by non-financial entities, with banks owning only 9 general insurers. In contrast, 9 out of the 24 life insurers were owned by Australian banks and they focus mainly on wealth management products. On the other hand, insurance and fund management typically account for only 3 to 8 percent of the group income for the four large domestic banks.

Table 4.

Ownership Structure as at 30 June 2011

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Source: APRA

10. Insurances delivered by the social security system are not regulated by APRA. These include: a) health, disability and sickness insurance provided by the Department of Human Services through Medicare and Centrelink; b) workers’ compensation insurance, builder’s warranty insurance and accident insurance for motor accident injuries provided by state statutory authorities in some states; c) medical indemnity reinsurance provided by the Department of Health and Ageing; and d) terrorism reinsurance provided by the Australian Reinsurance Pool Corporation (commercial lines only).

Life insurance industry

11. The life insurance industry in Australia is dominated by three groups when measured by assets, with a low level of overseas operations. However, there is much greater diversification when measured by life insurance cover because a number of life insurers focus on term life and disability income insurance. The top three life insurers 7 accounted for 66 percent of the total assets of life insurers as at end-June 2011. This trend continued in 2010/11 and further rationalization of the multiple licenses held by a number of financial groups is expected in the near term. Of the top 10 life insurance groups, only three had overseas operations.8 However, more than 99 percent (weighted average) of their premiums were sourced domestically. In terms of ownership, 92 percent of the life industry’s assets were held by Australian owners, with French owners having a 6 percent interest.9

12. The broader financial services industry has moved away from the traditional business model that utilized life insurers for wealth creation business. Notwithstanding this, much of the life insurance market is focused on wealth management business (Table 5). Driven by tax and government policies, wealth management products (mainly in the form of unit-linked policies) comprised almost 70 percent of business in 2010/11. Life insurers offer superannuation products through statutory funds,10 totaling A$ 38.7 billion as at end-2010 or 3 percent of total superannuation assets. However, life insurers’ share of total Australian superannuation assets had fallen from its peak of 44 percent 20 years ago to 15 percent in early 2012. Despite this trend, life insurers’ superannuation assets continued to grow at 6 percent per annum, due largely to investment earnings.

Table 5.

Major Lines of Life Insurance Business

(in A$ million)

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Source: APRA

13. The four banking groups continue to dominate the Australian wealth management and life insurance markets. Notably, life insurers must hold capital resources for their wealth management products compared to competitors in the other financial industries. The merger of AMP and AXA Asia Pacific Holdings’ Australian and New Zealand business was completed in March 2011, with increased size and resources to rival the big four banks in the wealth management segment.11

14. In recent years, life risk insurance business has been growing at a fairly constant rate, and expanded by 10 percent in 2010. A key contributor to this growth is the default level of insurance cover provided by many superannuation schemes. The key products are mainly age-rated guaranteed renewability policies for death, disability covers, etc. Products catering for retirement, e.g., allocated pension (unitized market-linked) have been popular for many years. However, there is little interest in annuities. Life policies are mainly distributed by independent or aligned advisers but direct sales (television, internet, etc.) have been growing rapidly in recent years, albeit from a small base. An increasing number of life insurers are offering simple products (low-value funeral plans, etc.) through direct channels, often targeted at the lower social economic demographics; APRA is closely monitoring the potential operational and reputational risks.

15. The bulk of life insurers’ assets were held in equities (A$ 117 billion or 51 percent) and debt securities (A$ 71 billion or 31 percent) as at end-June 2011. Total assets rose by 1.5 percent from A$ 227 billion to A$ 230 billion, the growth coming almost entirely from investment earnings. The high proportion of equity investments was largely attributable to life insurers’ unit-linked polices (ULP) portfolio. Cash and bank balances totaled A$ 17.4 billion.

16. Profitability of life insurers has stabilized although remained uneven, reflecting the diversified range of business models. In general, profitability has stabilized at a level achieved prior to the 2008/09 global financial crisis, driven largely by investment earnings on reserves and retained profits for non-investment-linked business. While aggregate claims experience had deteriorated recently, it would appear to be insurer-specific and not widespread. Profits from pricing margins for group and wholesale business have been eroding due to intensifying competition and the stronger bargaining power of the increasingly-large industry superannuation funds.

17. The overall capital adequacy coverage ratio15 for the life insurance industry was 142 percent as at end-June 2011, a slight decrease from the 149 percent as at end-2009/10. The aggregate technical provisions (TP) maintained by life insurers was A$ 201.8 billion, which accounted for 88 percent of total liabilities. Total shareholders’ funds amounted to A$ 16.2 billion.

18. The key risks for the life insurance industry include depressed financial markets, inadequate pricing and strategic risks. In response to the heightened market uncertainty from the middle of 2011, APRA has been monitoring emerging developments closely. There were concerns over the sustainability of pricing for large group risk schemes given a trend towards reductions in premiums and generous profit sharing arrangements. Life insurers are reviewing their strategies, business models and practices to prepare for various policy and legislative changes, e.g., government policies on financial advice (and remuneration), superannuation reforms and proposed changes in the prudential standards, e.g., enhanced/harmonised capital regime. In response, life insurers may have to refocus their strategies, capital management, governance, compliance, distribution channels and required competence to deal with the changes. The move by some life insurers to the greater use of direct marketing channels may pose underwriting and pricing risks.

General Insurance Industry

19. There is high concentration in the personal lines of business. The top three insurers for this segment accounted for about 75 percent of earned premiums in 2010/11. The commercial lines are more diversified across the general insurers. Most commercial lines of business were placed through brokers, while personal lines were mainly sold by direct marketing channels. Of the insurance groups, only QBE Insurance had a significant share of its operations overseas, which represented more than two-thirds of its premiums for 2010/2011 and assets as at end-June 2011.

20. Property and motor insurance accounted for more than one-half of general insurance business for the past three years (Table 6). The growth in property (including householders) premium in 2010/2011 could be attributed to increased premiums rates in response to a series of natural catastrophes. Growth in domestic motor vehicle premium has started to plateau due to pricing competition amongst incumbents and the entry of new players in this profitable class of business. The overall net retention ratio for the past three years has been relatively high at around 75 percent. Compulsory lines of business include workers’ compensation, compulsory third party insurance for motor vehicle drivers and builders/home warranty insurance in some states.

Table 6.

Major Lines of General Insurance Business

(in A$ million)

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Source: APRA

21. Total assets of general insurers rose 14 percent to reach A$ 100 billion as at end-June 2011, A$ 12.7 billion was invested in government securities and A$ 17.6 billion in corporate securities (mainly in banks). Reinsurance recoverables totaled A$ 15.2 billion, with more than 90 percent due from reinsurers rated A or above. Cash and bank balances amounted to only A$ 1.7 billion. General insurers’ intra-group receivables totaled A$ 4 billion.

22. Despite the spate of natural disasters in 2010/11, general insurers reported profits, albeit at a lower level. Gross losses from the Christchurch earthquake were estimated at A$ 11.2 billion, although the impact was dampened by insurers’ reinsurance programs and stronger investment income.20 However, higher claims arising from the catastrophes resulted in reinsurers raising their renewal rates and some reinsurers have subsequently been reluctant to write lower layers of catastrophe cover or offer aggregate reinsurance programs. Consequently, many insurers retained higher catastrophe risks and APRA has been monitoring the situation closely to ensure prudent risk retention is maintained. Some insurers have passed the higher costs to policyholders through higher premiums, particularly for home building and contents policies.21 In 2011, insurers also had to increase their TP for long-tail claims due to the decline in risk-free interest rates used to discount liabilities. The resulting small underwriting loss was mitigated by higher valuation gains from their duration-matched assets.

23. Mortgage debt levels and elevated housing prices are key vulnerabilities for the lenders mortgage insurance (LMI) sector. While the overall LMI sector was supported by a strong Australian economy and a sustainable immigration rate that held up housing prices, this positive outlook could be undermined by extended weakness in the global market.

24. The general insurance industry remains well-capitalized, holding capital resources equivalent to 175 percent of the minimum capital requirement as at end-June 2011. This was a slight decrease from 191 percent as at end-June 2010, largely attributable to increases in required capital for the higher reinsurance recoveries and insurance concentration risk. TP increased significantly from A$ 51.9 billion to A$ 64.8 billion (65 percent of total liabilities). Aggregate shareholders’ funds amounted to A$ 25.1 billion (A$ 25.9 billion as at end-June 2010). Intra-group liabilities totaled A$ 4.3 billion or 17 percent of shareholders’ funds.

25. The key risks for the general insurers are their exposures to catastrophic events and the counterparty risks arising from the reinsurance programs. The spate of natural disasters in Australia and New Zealand during 2010/11 has heightened insurers’ vigilance with regards to these risks. APRA also expects insurers to enhance their stress testing, including taking into consideration potential increases in reinsurance rates and severe reduction in reinsurance capacity.22 The Natural Disaster Insurance Review commissioned by the Australian Government released its final report in November 2011, and the recommendations included requiring insurers to provide flood cover as a standard in home building and contents policies. The Review also recommended a government agency to coordinate national flood risk management, including flood mapping, to enhance the industry’s understanding of and ability to price flood risks. The proposed review and harmonization of the capital standards for life and general insurers may also have significant implications for some general insures.

Reinsurance

26. The scale of APRA-authorized reinsurance operations in Australia is small. The top three general reinsurers by gross earned premiums were Munich Re, Swiss Re and Hannover Re, all of which operate in Australia through branches. General Re is the only APRA-authorized general reinsurer that is locally incorporated. The top three APRA-authorized life reinsurers are Swiss Re, Munich Re and RGA Reinsurance Company, all of which operate through locally-incorporated companies. Some reinsurers underwrite both direct and reinsurance business. Net premiums of life reinsurers amounted to A$ 1.6 billion in 2010/11, an increase of 12 percent from 2009/10. APRA-authorized general reinsurers wrote about A$ 1.5 billion, a marginal increase from 2009/10.

27. Despite the relatively lower life insurance penetration and the typically lower cessions by life insurers, there were more life reinsurers (12) than general reinsurers (7). Reinsurance premiums in respect of life business hovered around A$ 1.5 billion for the past three years. Reinsurance premiums for general business were also about A$ 1.4 billion for the same period. A new life reinsurer (SCOR Re) was admitted into the saturated life insurance market in Australia.

Institutional Framework and Arrangements

28. Australia adopts a functional regulatory structure. APRA is responsible for the prudential regulation of ADIs, life and general insurers (including reinsurers) and most of the superannuation industry. ASIC is responsible for market conduct regulation and supervision, promoting market integrity and consumer protection across the financial services sector. The Reserve Bank of Australia (RBA) is responsible for monetary policy as well as overseeing financial system stability and the payments system.

29. All the three financial sector authorities are statutory authorities and share responsibility with the Treasury for the stability, efficiency and integrity of the financial system. The Treasury advises the Australian Government on: a) the framework for financial sector regulation, as well as on policy and possible reforms to promote the stability and efficiency of the financial system; b) matters relating to the exercise of the Treasurer’s powers; and c) the broader economic and fiscal implications of developments that pose a threat to the stability of the financial system.

30. The Council of Financial Regulators (CFR) serves as a coordination forum for the three regulatory agencies and the Treasury, with the objectives of contributing to the efficiency and effectiveness of regulation and the stability of the Australian financial system. The CFR is a non-statutory body chaired by the Governor of the RBA and plays an active role in reviewing global market conditions, coordinating advice to the Government and enhancing Australia’s crisis management arrangements. It regularly forms working groups with agreed terms of reference to undertake more detailed policy development. During the global financial crisis in 2008/09, the CFR was the focal point for agency cooperation.

31. The CFR agencies have a long history of effective inter-agency cooperation and coordination on financial sector policy issues through: a) overlapping representation on the agencies’ boards: one APRA member sits on the RBA Payments System Board and the Secretary to the Treasury sits on the RBA Board; b) bilateral Memoranda of Understanding (MoU) between CFR members and an MoU on Financial Distress Management among the four CFR member agencies; c) regular bilateral coordination arrangements, e.g., the RBA-APRA Coordination Committee comprising senior executive staff from both agencies, which meets approximately every six weeks; and d) legislation that allows APRA and the RBA to share institution-level data to carry out their respective duties. Underlying all these formal structures is a culture of cooperation and collegiality.

32. The four CFR agencies work together to closely coordinate crisis management polices and responses. APRA, as the prudential supervisor, is the lead resolution authority. A number of enhancements have been made to the crisis management framework in the last five years. These include strengthening APRA’s statutory powers, formalizing the CFR’s coordination arrangements, implementing the Financial Claims Scheme, developing crisis resolution strategies in respect of ADIs, and conducting ADI crisis simulation exercises. The CFR agencies have also worked with their New Zealand counterparts to operationalize cross-border crisis resolution coordination arrangements.

33. APRA has embarked on two major regulatory initiatives in 2011/12: to enhance the solvency regimes for insurers and formalize conglomerate supervision. One is an updating and harmonization (where appropriate) of capital requirements for general and life insurers, including enhancing the risk-sensitivity of the capital framework. APRA expects to release the final revised capital standards in May 2012, with an effective date of 1 January 2013. APRA has also issued a consultation paper on the development of a prudential framework for conglomerate groups, referred to as Level 3 Supervision.

34. The regulation of private health insurance in Australia is primarily conducted under the Private Health Insurance Act 2007 (PHIA) and by the Private Health Insurance Administration Council (PHIAC) in relation to prudential supervision. PHIAC has close links with APRA. Private Health Insurance is an intrinsic element of Australia’s overall health system and is community rated, and not underwritten by health status. A risk-equalization trust fund is maintained in the sector to make up for the lack of underwriting. The Private Health Insurance Ombudsman deals with consumers’ complaints, health service provider and insurer contracting arrangements, and the conduct of agents and brokers. The Department of Health and Ageing also has regulatory powers, and focuses on pricing and product features. Other regulators with a role in the regulation of private health insurance include the Australian Competition and Consumer Commission (ACCC), which considers any competition issues (in consultation with PHIAC) and ASIC, in relation to the operation of the corporate entities.

D. Preconditions for Effective Insurance Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies

35. The macroeconomic and fiscal policy framework in Australia is well established. The Charter of Budget Honesty Act 1998 requires the Government to clearly and regularly outline its fiscal strategy and report on its fiscal objectives and expected outcomes. After taking fiscal measures to support the Australian economy during the global financial crisis, the Government’s current fiscal strategy is aimed at achieving a budget surplus in 2012/13. The RBA has established procedures to ensure transparency and accountability of its monetary policies and has committed to keeping the average inflation rate at between two and three percent.

36. Regulatory proposals of APRA and ASIC must comply with the Government’s policy on best practice regulation. The Office of Best Practice Regulation (OBPR)23 is part of the Deregulation Policy Division (DPD) of the Department of Finance and Deregulation. The OBPR promotes the Government’s objective of improving the effectiveness and efficiency of regulation. The DPD assists the Ministers responsible for deregulation through providing policy advice and support to reform poorly-performing government operations and regulations. The OBPR reports to the government annually on the compliance of various agencies, including APRA and ASIC, with the best regulation policies. The OBPR has consistently found both APRA and ASIC to be compliant with the policy on best practice regulation.

A Well-developed Public Infrastructure

37. The legal system in Australia is highly developed and the independence of the judiciary is respected. There is a comprehensive body of business laws, including those governing insolvency as well as contractual and property rights. All legislation must be passed by the two houses of the Federal Parliament, i.e., the Senate and the House of Representatives. There is a strict separation between the judiciary, the Parliament and Executive Government. The Australian courts uphold the principle of judicial independence, which ensures that judges are free from legislative and/or executive interference in performing their judicial functions. The High Court is the final court of appeal.

38. Accounting and auditing standards adopted in Australia are in line with international best practices. Accounting standards in Australia are made by the Australian Accounting Standards Board (AASB). The AASB is involved in the International Accounting Standards Board’s standard-setting process. The AASB issues the Australian-equivalent of the International Financial Reporting Standards (IFRS), which apply to Australian companies with the force of law. The Auditing and Assurance Standards Board (AUASB) establishes Australian auditing standards based on the International Standards on Auditing issued by the International Auditing and Assurance Standards Board. The Financial Reporting Council is responsible for overseeing the effectiveness of the financial reporting and auditing frameworks in Australia and oversees the activities of AASB and AUASB. Auditors must meet the registration requirements of ASIC and there are currently about 5,200 registered company auditors in Australia.

39. The Institute of Actuaries of Australia (IAAust) enforces professional and ethical standards of its members. It has 1,842 Fellow, 831 Associate and 1,060 student members as at May 2012. One-quarter of its members are based outside of Australia, including in New Zealand and Asian countries. Fellow members are fully qualified to sign actuarial reports required by APRA. The IAAust has established a Code of Professional Conduct to maintain the quality, integrity, and professional standards of practicing actuaries and has established an internal disciplinary process to enforce the Code and its professional standards. Since 2006, the IAAust publishes disciplinary action taken on its website. On average, there are about two new legitimate complaints annually, mostly relating to technical issues. Some of the complaints were referred by APRA.

40. APRA is the central repository of statistical information on the Australian financial sector. APRA supervisors have timely access to financial statistics from a wide range of financial institutions, both regulated and unregulated, as part of their supervisory assessments at entity, industry and cross-sectoral levels. Around 80 percent of APRA’s data collections are shared with or collected on behalf of other agencies, in particular the RBA and the Australian Bureau of Statistics. APRA produces 13 statistical publications, which provide regular updates on the financial performance of APRA-regulated industries.

Effective Market Discipline in Financial Markets

41. Australia’s corporate governance system complies with the Organization for Economic Cooperation and Development’s Principles of Corporate Governance. ASIC is responsible for monitoring and enforcing compliance with the corporate governance requirements in the Corporations Act 2001 (CA). Companies that are prudentially regulated by APRA are subject to additional corporate governance requirements set out in APRA’s prudential standards.

Mechanisms for Consumer Protection

42. The consumer protection regime in Australia is supported by three pillars: licensing of financial product advisers; continuous disclosure requirements; and access to dispute resolution mechanisms. Anyone who conducts financial services business in Australia or sells financial products must possess an Australian Financial Services License (AFSL) issued by ASIC. The CA and the Australian Securities and Investments Commission Act 2001 (ASIC Act) regulate consumer protection in relation to financial products.24

43. Consumers of financial services have a number of options for resolving disputes without going to a court or tribunal. These include mediation, conciliation, conferencing, neutral evaluation, and arbitration. ASIC also requires licensed entities to have internal and external dispute resolution mechanisms. The policy is to encourage alternative dispute resolution before commencing court proceedings. The Civil Dispute Resolution Act 2011 and the Financial Ombudsman Service (FOS) provides a framework for resolving disputes with financial service providers at no cost to the consumers. Both domestic and international arbitral awards can be enforced in Australia. Australia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Efficient Financial Markets

44. The financial markets in Australia offer a broad range of instruments that facilitate insurers’ asset-liability management. The 2,222 companies listed on the Australian Securities Exchange (ASX) had a combined market capitalization of A$ 1.17 trillion as at end-2011. The ASX has an average daily turnover of around A$ 5 billion. Australia’s over-the-counter market is active but small by international standards, with a turnover of around A$80 trillion in financial year (FY) 2010/11. However, Australia’s debt market is relatively underdeveloped, with a low turnover in corporate bonds (A$ 900 billion in FY 2010/11). The RBA regulates the payments system, as well as providing oversight of the stability of clearing and settlement facilities.

Table 7.

Summary of Compliance with the ICPs

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Summary of Observance Level

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Table 8.

Recommendations to Improve Observance of ICPs

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Authorities’ responses to the assessment

45. The Australian authorities wish to express their appreciation to the IMF and its assessment teams for their assessment. Australia is strongly committed to the FSAP process and the insights that the FSAP provides into a country’s financial sector. Australia acknowledges that it is important to continually review and seek to improve the regulatory framework and supervision practices.

46. The Australian authorities share the view expressed in the report that Australia has a high level of observance with the Insurance Core Principles, supported by robust supervision by APRA. There are, however, some areas where the Australian authorities disagree with the assessment or do not consider that the recommendations will necessarily support better regulatory outcomes.

47. The Australian authorities consider that there are some principles for which the rating does not reflect the strengths and performance of Australia’s supervisory approach or where the issues raised do not reflect actual deficiencies in practice or outcomes. These include the following Core Principles:

  • CP 17 Capital adequacy. The Australian authorities strongly disagree with the assessment. Australia is rated=Largely Observed’ on the basis that the solvency control levels are not transparent or consistent. However, the Australian authorities consider that APRA sets very robust capital requirements under a consistent and transparent framework. APRA sets a relatively high level for the Minimum Capital Requirement (MCR), supplemented by a Prescribed Capital Requirement (PCR) determined separately for each insurer based on its risk profile. Introducing a simple relationship between these control levels would, apparently, address the issue identified in the assessment. The Australian authorities’ view, however, is that a simple relationship is not appropriate, given the complex nature of insurance and the variety of insurance businesses. The Australian authorities remain of the view that APRA’s capital framework better addresses the inherent risks of each insurer and the manner in which they are addressed by the insurer. At the same time, APRA’s capital framework is transparent to the market. APRA intends to retain this approach under the new regulatory capital framework for general and life insurers effective from January 1, 2013.

  • CP 2 The supervisor. The Australian authorities have concerns about the rationale for the rating for operational independence, accountability, transparency and adequacy of resources. While the authorities understand the reasons for the assessment, the authorities consider the impact of these matters on independence of the regulators has been overstated and Australia has been assessed with an undue focus on process rather than outcomes. APRA and ASIC are both established as statutory authorities at arm’s length from Government and with substantial statutory and operational independence.

  • CP 20 Public disclosure. The Australian authorities accept the assessment. However, the authorities wish to re-emphasize that all insurers are already subject to significant public disclosure obligations under the Corporations Act and Australian accounting standards, while listed insurers are subject to additional continuous disclosure and governance disclosure obligations. For example, accounting standards include specific standards for listed and unlisted life insurers and general insurers that contain accounting and disclosure requirements for public financial reporting that go well beyond the requirements under the International Financial Reporting Standards that apply in many jurisdictions. These standards include disclosure requirements for financial results, capital and liability valuation. A listed insurer is also required to make comprehensive and timely disclosures, covering governance and risk management. Nonetheless, the Australian authorities acknowledge that disclosure obligations of unlisted insurers could be brought into line with international standards and will consider how this could best be achieved.

  • CP 19 Conduct of Business. The Australian authorities accept some of the findings but consider that insufficient weight has been given to the existing Corporations Act and Insurance Contracts Act provisions that seek to achieve fair treatment of customers. In relation to supervision of insurers and insurance intermediaries, the Australian authorities note that implementation of the recommendations will require further funding and resources. The authorities will review the approach to supervision in light of future funding decisions.

  • CP 5 Suitability of persons and CP 6 Changes in Control and Portfolio Transfers. The assessment recommends requirements for notification of any circumstances that may materially adversely affect the suitability of significant owners, and any significant decrease in the ownership below the pre-determined control levels. The Australian authorities accept these recommendations, but note that there is no evidence that the absence of such notification requirements has led to any adverse prudential outcomes in Australia.

  • CP 26 Cross-border cooperation and coordination on crisis management. The assessment recommends a requirement for insurers to implement contingency plans and procedures for use in a going- and gone-concern situation. In response, the Australian authorities note that APRA is considering the possible scope and nature of recovery planning requirements for insurers. Insurers will also be required to maintain Internal Capital Adequacy Assessment Processes (ICAAPs), under changes to come into effect on 1 January 2013, that involve a degree of contingency planning for events that could pose a threat to their capital position.

  • CP 22 Anti-Money Laundering and Combating the Financing of Terrorism. The assessment comments that the Australian authorities should periodically reconsider whether general insurance should be subject to the more comprehensive requirements prescribed by the AML/CTF Act. Australia already adopts this approach. In 2011, Australia undertook a national threat assessment on money laundering that did not reveal money laundering through general insurance to be a threat. Australia has also undertaken a number of organized crime threat assessments over recent years and, again, money laundering through general insurance services has not appeared to present a threat. Australia will continue to monitor the environment for money laundering and terrorism financing threats in the general insurance sector and, if necessary, develop suitable legislative responses to those threats.

II. Detailed Principle-by-Principle Assessment

Table 9.

Detailed Assessment of Observance of the ICPs

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