Prudential Standard GPS 120
Assets In Australia for General Insurers
Objective and Key Requirements of this Standard
This Prudential Standard provides guidance on when assets will be counted as “assets in Australia.”
The primary purpose of this Standard is to specify certain assets that will not be counted as “assets in Australia” for the purposes of section 28 of the Insurance Act 1973 (the Act). Section 28 requires all insurers to maintain assets in Australia (excluding goodwill and assets excluded by this Standard) of a value that equals or exceeds the total amount of the insurer’s liabilities in Australia.
This requirement is designed to ensure that the total value of assets held within the jurisdictional reach of APRA and the Australian courts is sufficient to meet an insurer’s Australian liabilities. It assists in the enforcement of section 116 of the Act, which provides that in the winding up of an insurer, the assets in Australia shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless all the Australian liabilities have first been discharged.
In addition to the broad purpose above, this Standard also defines “assets in Australia” for the purposes of GPS 110 Capital Adequacy. GPS 110 requires that foreign insurers operating in Australia as branches (foreign insurers) must maintain assets in Australia in excess of their liabilities in Australia, of an amount at least equal to their Minimum Capital Requirement (MCR). Additional guidance relating to the MCR is set out in GPS 110.
Prudential Standard
- This Prudential Standard, made under section 32 of the Insurance Act 1973 (the Act), applies to all general insurers authorised under the Act.
Requirement to Maintain Assets Inside Australia
- The Act sets out a number of assets and liabilities which are to be treated as assets or liabilities in Australia.[23] However, the Act does not provide an exhaustive definition. This Standard specifies additional requirements for that purpose.
Assets not included as in Australia
- The prudential standards may specify assets that are not considered as assets in Australia.[24] For this purpose, the following assets are excluded (in addition to goodwill[25]):
(a) other intangible assets;
(b) future income tax benefits (net of provisions for deferred income tax liabilities);
(c) assets under a fixed or floating charge, mortgage or other security (to the extent of the indebtedness secured by such assets); and
(d) assets otherwise excluded under paragraphs 4-17 below.
(i) Chattels and real property
- In relation to a locally-incorporated insurer, an asset comprising a chattel or real property, or an asset that is an equitable interest in a chattel or real property, will not be regarded as an asset in Australia unless:
(a) either:
(i) the legal title is held by the insurer or the insurer’s custodian (and that custodian is incorporated in Australia); and
(ii) the physical asset is located in Australia; or
(b) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in sub-paragraph (a)(i), the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
- In relation to a foreign insurer, an asset comprising a chattel or real property, or an asset that is an equitable interest in a chattel or real property, will not be regarded as an asset in Australia unless:
(a) either:
(i) the legal title is held by the foreign insurer’s agent in Australia,[26] or by a custodian appointed by the foreign insurer’s agent in Australia and that custodian is incorporated in Australia (to ensure that the foreign insurer’s agent has control over the asset); and
(ii) the physical asset is located in Australia; or
(b) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in sub-paragraph (a)(i), the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
(ii) Loans and amounts due (including debentures)
- In relation to a locally-incorporated insurer, an asset which is a loan to, or amount due from, another person (including an investment, such as a debenture, held with Austraclear or RITS), or an asset which is an equitable interest in such a loan or amount due, will not be regarded as an asset in Australia, unless:
(a) either:
(i) the creditor, or owner of the asset, is the insurer or the insurer’s custodian and that custodian is incorporated in Australia; and
(ii) the outstanding amount is payable in Australia and the debtor is physically located in Australia;
(b) or:
(i) the asset is held on a securities system in Australia (eg Austraclear or RITS) and can be readily sold in Australia; and
(ii) the account in which the asset is held in the securities system is controlled by the insurer or the insurer’s custodian and that custodian is incorporated in Australia; or
(c) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in sub-paragraph (a)(i), the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
- In relation to a foreign insurer, an asset which is a loan to, or amount due from, another person (including an investment, such as a debenture, held with Austraclear or RITS), or an asset which is an equitable interest in such a loan or amount due, will not be regarded as an asset in Australia, unless:
(a) either:
(i) the creditor, or owner of the asset, is the agent in Australia of the foreign insurer or a custodian appointed by the foreign insurer’s agent in Australia and that custodian is incorporated in Australia (to ensure that the foreign insurer’s agent in Australia has control over the asset); and
(ii) the outstanding amount is payable in Australia and the debtor is physically located in Australia;
(b) or:
(i) the asset is held on a securities system in Australia (eg Austraclear or RITS) and can be readily sold in Australia; and
(ii) the account in which the asset is held in the securities system is controlled by the agent in Australia of the foreign insurer or a custodian appointed by the foreign insurer’s agent in Australia and that custodian is incorporated in Australia (to ensure that the foreign insurer’s agent in Australia has control over the asset); or
(c) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in sub-paragraph (a)(i), the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
(iii) Shares
- In relation to a locally-incorporated insurer, an asset held by the insurer which is a share, or an equitable interest in a share, will not be regarded as an asset in Australia unless:
(a) it is registered within Australia, and is under the direct control of the insurer or its custodian and that custodian is incorporated in Australia; or
(b) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in sub-paragraph (a) and the share is registered in Australia, the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
- In relation to a foreign insurer, an asset held by the insurer which is a share, or an equitable interest in a share, will not be regarded as an asset in Australia unless:
(a) it is registered within Australia, and is under the direct control of the foreign insurer’s agent in Australia or a custodian appointed by the foreign insurer’s agent in Australia and that custodian is incorporated in Australia (to ensure that the foreign insurer’s agent in Australia has control over the asset); or
(b) the asset is an equitable interest, or an interest in a managed investment scheme, the interest is held by a person mentioned in paragraph (a) and the share is registered in Australia, the interest is covered by paragraphs 10-16, and is not excluded from being an asset in Australia under those paragraphs.
(iv) Units in unit trusts
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A unit in a unit trust will not be regarded as an asset in Australia except where the trustee and, if applicable, the responsible entity is (if a natural person) resident in Australia or (if incorporated) is incorporated in Australia.
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A unit in a unit trust will not be regarded as an asset in Australia if the underlying assets would not be assets in Australia if held by the insurer itself (or, in the case of a foreign insurer, the foreign insurer’s agent in Australia).
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However, APRA may in its discretion determine that paragraph 11 does not apply to the interest of a particular insurer in a diversified trust which contains some assets that are not regarded as assets in Australia within the meaning of the Act or this Standard.
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A unit in a unit trust will not be regarded as an asset in Australia if, under the trust deed, the trustee has the right to suspend or delay the redemption of the unit pending sale of any of the trust’s property outside Australia.
(v) Assets held on trust other than through a unit trust, or held through a managed investment scheme
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An asset held on trust, other than through a unit trust, or an interest in a managed investment scheme, will not be regarded as an asset in Australia except where the trustee and, if applicable, the responsible entity is (if a natural person) resident in Australia or (if incorporated) is incorporated in Australia.
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An equitable or similar interest of an insurer in an asset (the “underlying asset”) held on trust, other than through a unit trust,[27] or under a managed investment scheme, will not be regarded as an asset in Australia if the underlying asset would not be an asset in Australia if held by the insurer itself (or, in the case of a foreign insurer, the foreign insurer’s agent in Australia).
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However, APRA may in its discretion determine that paragraph 15 does not apply to the interest of a particular insurer in a diversified trust which contains some assets that are not regarded as assets in Australia within the meaning of the Act or this Standard.
(vi) Reinsurance
- The Act permits certain reinsurance assets to be regarded as assets in Australia. Before these assets are accepted as assets in Australia, an insurer must be able to demonstrate to APRA that the assets meet the criteria specified in section 116A of the Act, by providing appropriate evidence to APRA.
Foreign Insurers
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As set out in GPS 110 Capital Adequacy, foreign insurers do not typically have capital instruments of the type specified in Guidance Note GGN 110.1 Measurement of Capital Base. Foreign insurers are nevertheless required to meet a variant of the MCR. Specifically, foreign insurers are required to maintain assets in Australia in excess of their liabilities in Australia, of an amount at least equal to their MCR.
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For the purposes of meeting this requirement, APRA will use the same criteria for assessing what is an asset in Australia as is used for complying
with section 28 of the Act (ie see paragraphs 3-17 above, and section 116A of the Act).