Part Guidance Note GGN 220.1 - Insurance Act 1973 - Determination of Prudential Standards - GPS 110 - Capital Adequacy for General Insurers; GPS 120 - Assets in Australia for General Insurers; GPS 210 - Liability Valuation for General Insurers; GPS 220 - Risk Management for General Insurers; GSP 230 - Reinsurance Arrangements for General Insurers; GPS 410 - Transfer and Amalgamation of Insurance Business for General Insurers and Transitional Prudential Standard GPS 900- Early Approvals of Auditors and Actuaries (07/02/2002) - Guidance Note GGN 220.1

Guidance Note GGN 220.1

Governance

The internal governance structure of an insurer is critical to ensuring that the interests of policyholders are protected. For an internal governance structure to be effective, the Board, senior management and appointed experts of an insurer must have the probity and competence necessary to develop, monitor and review sound systems for managing risk.
In addition, risk management and control systems should be supported by a strong and fully informed Board, the use of Board Audit Committees and independent experts.

Fitness and Propriety

In accordance with paragraphs 2-3 of GPS 220 Risk Management, insurers must ensure that persons occupying key positions within the insurer have the degree of probity and competence commensurate with their responsibilities. For this purpose, insurers should have in place policies and procedures to address fitness and propriety. Accordingly, insurers must assess all new persons filling key positions, and those of existing staff, and should review these assessments at least annually.
An insurer should notify APRA immediately if a key person no longer complies with the tests of fitness and propriety established by the insurer.
APRA may conduct a review of the fitness and propriety of an individual. Where APRA conducts such a review, APRA will allow access to the information collected as part of the review where the provider of the information has granted permission for the information to be released. APRA will not release information where it is prohibited from doing so under any agreement with the provider of the information or under any law.

Roles and Obligations of Key Positions

(i) Boards

Paragraphs 17-18 of GPS 220 set out the requirements for the composition of an insurer’s Board. The Board of an insurer must collectively possess appropriate skills and experience to understand the risks of that insurer’s business. This could include (but is not limited to) actuarial, accounting, finance, insurance business and legal expertise.
In the case of a foreign-owned locally-incorporated insurer, non-executive directors (including the Chair) of the local Board may include Board members or senior management of the parent company (including insurance subsidiaries of the foreign parent). APRA will also accept a Board member or senior manager of the parent company to be the Chair of the Australian insurer provided the Chair is available to consult with APRA if required.
Non-executive directors are persons not part of the management of the insurer, nor of any related body corporate[52] of the insurer.[53]
The Board must provide the Approved Auditor and Approved Actuary of the insurer with the opportunity to raise matters directly with the Board. This includes instances where the matters have already been raised with senior management or the Board Audit Committee, but have not been dealt with to the satisfaction of the Approved Auditor or Approved Actuary.

(ii) Board Audit Committees

Audit Committees play an important role in establishing, maintaining and developing the control systems and compliance culture within an insurer. Locally incorporated insurers must have a Board Audit Committee.
Where the insurer is part of a larger corporate group, APRA may allow the insurer to use the Group Audit Committee as its Board Audit Committee where it is demonstrated that the Group Audit Committee can effectively address the needs of the insurer. In addition, the Board of the insurer must retain the authority to commission the Group Audit Committee to undertake work on behalf of the insurer. The Board of the insurer must also be able to arrange meetings with the Group Audit Committee in order to determine matters particular to the business of the insurer.
The Audit Committee should, at a minimum, oversee the insurer’s financial reporting, internal and external audits, the appointment of the Approved Auditor, and generally assist the Board in providing an objective, non-executive review of the effectiveness of the insurer’s financial reporting and risk management and control processes.
The Audit Committee must review the Approved Auditor’s engagement every year, including evaluating the Approved Auditor’s independence in accordance with Statement of Auditing Practice AUP 32 “Audit Independence”.[54]
While some duties placed on directors may be delegated to the Audit Committee, the Board retains ultimate responsibility for ensuring that those duties are performed. The insurer must make such arrangements and give the Audit Committee sufficient powers to enable it to obtain all information necessary for the performance of its functions.
The Audit Committee must invite the Approved Auditor and Approved Actuary of the insurer to the meetings of the Audit Committee and, where necessary, provide the Approved Auditor and Approved Actuary with the opportunity to bring matters to the attention of that Committee without reference to the other directors or senior management of the insurer.

(iii) Approved Auditors and Approved Actuaries

An insurer must appoint an auditor (Approved Auditor) in accordance with the Act, and have this appointment approved by APRA.[55]
Subject to paragraph 19, an insurer must appoint an actuary (Approved Actuary) in accordance with the Act, and have this appointment approved by APRA.[56]
The Approved Auditor’s primary role is to provide an independent and objective view on the truth and fairness of financial statements, and the Approved Auditor may also provide an assessment of the internal controls and processes within an insurer. The Approved Actuary’s primary role to provide advice on the valuation of insurance liabilities.
An insurer will be exempt from the requirement to have an Approved Actuary where:

(a) the total insurance liabilities of the insurer are less than $20 million, and do not include a material amount in respect of a class of business which is long tail business. Long tail business refers to those classes of business where the claims are typically settled one year or more after the date of occurrence of the event that gives rise to the claim; or

(b) the insurer is able to satisfy APRA that actuarial advice is not warranted (in these cases, APRA will also need to seek the approval of the Treasurer for such an exemption).[57]

An insurer seeking to take advantage of the exemption granted under paragraph 19(a) must inform APRA, and provide evidence that the criteria have been met. APRA may request that the insurer provide additional information at any time to ensure that the insurer still meets the criteria for an exemption.
Notwithstanding any exemption available under paragraph 19, APRA may at its discretion still require the insurer to have an independent actuarial review undertaken.[58]

- The approval process

The Act requires that APRA approve the insurer’s appointment of an auditor and actuary. For this purpose, an application for approval of an auditor or actuary must be submitted in writing by the insurer to APRA. An application must include the following details:

(a) the name, address and telephone number of the person;

(b) whether the person is an employee of the insurer, or if not, the name of any firm that the person is an employee or partner of;

(d) details on the criteria for fitness and propriety set out in paragraph 6 of GPS 220;

(e) a statement of the pecuniary interests which the person, or a related person, has in the insurer, or a related body corporate of the insurer, for instance:

(i) a security in, or contract with, the insurer or a related body corporate; and

(ii) the receipt of any remuneration, specified by type of service, from the insurer or a related body corporate;

A related person of the Approved Auditor or Approved Actuary means a spouse, or a dependent child, or a business partner, or an employer (other than the insurer), or a firm of which the Approved Auditor or Approved Actuary is a director or partner.

(f) in the case of an Approved Auditor, an attestation from the proposed auditor that he/she complies with Statement of Auditing

Practice AUP 32 “Audit Independence”. Where there is non-compliance, details of that must be provided.

In addition, the proposed Approved Auditor or Approved Actuary must provide APRA with a written undertaking that he or she will perform his or her functions in accordance with all prudential requirements issued by APRA and standards issued by relevant professional bodies.

Routine Reporting

(i) Approved Auditor

The Approved Auditor must audit the yearly statutory accounts of an insurer as required by the Act.[59] The Approved Auditor must provide a certificate to the insurer specifying whether, in the Approved Auditor’s opinion:

(a) the insurer has adequate systems and procedures in place to ensure it observes all the prudential standard requirements APRA has set for the insurer;

(b) the statistical and financial data provided by the insurer to APRA in its yearly statutory accounts are reliable;

(c) the insurer has adequate systems and procedures in place to ensure it complies with statutory general insurance requirements, any conditions on the authority to carry on insurance business, and any other conditions imposed by APRA in relation to an insurer’s operations; and

(d) there are any matters which will, or are likely to, adversely affect the interests of insurer’s policyholders.

Where the Approved Auditor is unable to satisfy these requirements (for example, if there are accounting records that have not been appropriately kept, transactions that appear irregular or that have not been accurately or properly recorded, requests for information and explanation that have not been met, or aspects to the accounts that do not truly represent the transactions and financial position), the certificate should contain details of these matters.

(ii) Approved Actuary

The Approved Actuary must prepare a report in accordance with this Guidance Note, GPS 210 Liability Valuation and any other guidance or any relevant professional standards at the end of each financial year of the insurer.
The report must provide:

(a) written advice in respect of the value of the insurer’s liabilities in accordance with GPS 210; and

(b) whether there are any matters arising out of the preparation of this advice which will, or are likely to, adversely affect the interests of the insurer’s policyholders.

In particular, the report must provide details of, in respect of each class of business:

(a) an estimate of the value of insurance liabilities determined in accordance with GPS 210 (where necessary, this might also include an indication of the conceivable range of values, between which the true value of the insurance liabilities might lie);

(b) assumptions used in the valuation process;

(d) significant aspects of the recent experience;

(e) the model(s) used;

(f) the approach taken to estimate the coefficient of variation where this is used;

(g) an indication of the uncertainty in the estimate of the coefficient of variation; and

(h) the sensitivity analyses undertaken.

For each calculation date, the Approved Actuary must reassess the appropriateness of the assumptions and valuation methods the insurer uses to determine its insurance liabilities. Where a change in assumptions or method is made by the Approved Actuary or the insurer, the effect of that change on the value of the insurance liabilities must emerge in the current calculation period – it is not appropriate that the effects of such a change be spread over future calculation periods.
In addition, where there has been a change in assumptions or in valuation method from that adopted at the previous valuation, the effect of these changes must be disclosed in the written advice.
In general, care should be taken to ensure that results are not presented in a way that gives the impression of greater reliability than is actually the case. This applies, in particular, in situations where materially different results could reasonably be justified.
Abbreviated details are appropriate for a class of business that is not material.
The Approved Actuary must provide the report to the insurer’s Board within such time as to give the Board a reasonable opportunity to consider and use the report in preparing the insurer’s yearly statutory accounts for that financial year.
The insurer must submit the Approved Actuary’s report to APRA on or before the day that the insurer’s yearly statutory accounts are required to be given to APRA under the Financial Sector (Collection of Data) Act 2001.
Where an insurer includes in its accounts a value for insurance liabilities which is inconsistent with the advice received from the Approved Actuary, or is not determined in a manner consistent with the principles of GPS 210, the insurer must notify APRA in writing, and should include within its published annual financial accounts:

(a) the reasons for not accepting the Approved Actuary’s advice, or for not determining the insurance liabilities in a manner consistent with GPS 210; and

(b) details of the alternative assumptions and methodologies used for determining the value of the insurance liabilities.

Non-routine Reporting by Auditors and Actuaries

The Act specifies a number of instances in which an Approved Auditor or Approved Actuary is obliged to report to APRA on a non-routine basis.[60]
In fulfilling this obligation, Approved Auditors and Approved Actuaries are not required to actively seek out instances where prudential requirements may be breached or policyholder interests may be threatened, but must report any such instances when identified in the course of fulfilling their functions. That said, should an Approved Auditor or Approved Actuary come across such a matter during the course of undertaking an activity not specifically required by APRA, the Approved Auditor or Approved Actuary must still provide that information to APRA.
In assessing whether the interests of policyholders may be materially prejudiced, an Approved Auditor and Approved Actuary should consider not only a single activity or single deficiency. Policyholder interests may be materially prejudiced by a number of activities or deficiencies that may not of themselves result in a material threat to policyholder interests but, when considered in total, do amount to a material threat. In such cases, an Approved Auditor or Approved Actuary should provide such information to APRA.
In most cases, matters reported to APRA by the Approved Auditor or Approved Actuary should also be reported by that person to the insurer. However, the Approved Auditor or Approved Actuary does not need to notify the insurer where that person considers that by doing so the interests of the policyholders would be jeopardised, or, where there is a situation of mistrust between the Approved Auditor or Approved Actuary and the Board or senior management of the insurer.
An Approved Auditor or Approved Actuary that provides information to APRA in the course of non-routine reporting is not excused from giving the information to APRA on the grounds that doing so would tend to incriminate that person or make them liable to a penalty. Protection is provided under the Act[61] to Approved Auditors or Approved Actuaries that supply information to APRA in these circumstances.
In addition, an Approved Auditor or Approved Actuary is encouraged to provide information to APRA if that person considers it will assist APRA in the performance of its functions under the Act or the Financial Sector (Collection of Data) Act 2001.[62]

Other Functions of Approved Auditors and Approved Actuaries

An Approved Auditor may also be required to undertake other functions specified by APRA. In addition, insurers may also seek the advice of the Approved Auditor in relation to other matters, for instance the adequacy of the insurer’s risk management and control framework, should the insurer consider this appropriate.
An Approved Actuary may also be required to undertake other functions specified by APRA. Insurers may also seek the advice of the Approved Actuary in relation to other matters, for instance the adequacy of the insurer’s reinsurance arrangements, should the insurer consider this appropriate.

Guidance Note GGN 220.1Guidance Note GGN 220.1

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