Section Prudential Standard GPS 120 - Insurance (prudential standard) determination No. 8 of 2006 - Prudential Standard GPS 120 - Assets in Australia - Prudential Standard GPS 120 | Zoe
Insurance (prudential standard) determination No. 8 of 2006 - Prudential Standard GPS 120 - Assets in Australia
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Objective and key requirements of this Prudential Standard
The primary purpose of this Prudential Standard is to specify certain assets that are excluded as “assets in Australia” for the purposes of section 28 of the Insurance Act 1973. The assets excluded are those which would otherwise fall within the definition of “assets in Australia” but which APRA considers to have doubtful or no value to policyholders in Australia in the event of a general insurer becoming insolvent.
Section 28 requires all general insurers to maintain assets in Australia (excluding goodwill and other amounts excluded by this Prudential Standard) of a value that equals or exceeds the total amount of the general 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 a general insurer’s liabilities in Australia.
Prudential Standard GPS 110 Capital Adequacy requires that a foreign general insurer operating in Australia as a branch maintain assets in Australia, in excess of its liabilities in Australia, of an amount at least equal to its Minimum Capital Requirement. For the Minimum Capital Requirement, refer to Prudential Standard GPS 110 Capital Adequacy.
This Prudential Standard includes the ability for APRA to agree to limited transition arrangements. These provisions are set out in Attachment A.
Authority
This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act) for the purposes of paragraph 28(a) of the Act.[1]
Application
Paragraphs 7 to 19 apply to locally incorporated general insurers. Paragraphs 20 to 26 apply to foreign general insurers (foreign insurers).[2] The remaining paragraphs apply to all general insurers (insurers).
This Prudential Standard applies to insurers from 1 January 2007 (effective date). Until the effective date, Prudential Standard GPS 120 Assets in Australia for General Insurers made on 7 February 2002 continues to apply.
Interpretation
By operation of subsection 13(1) of the Legislative Instruments Act 2003, terms not defined in this Prudential Standard but which are defined in the Act have the same meaning as in the Act.
In this Prudential Standard:
agent in Australia means a person appointed under section 118 of the Act;
Austraclear means the Central Securities Depository service operated by Austraclear Limited ACN 002 060 773;
Australian depository means Austraclear, RITS and CHESS Depository Nominees Pty Ltd and any similar facility in Australia for the holding and trading of securities (whether debt or equity);
Clearstream means the International Securities Depository Service of Clearstream International S.A., a company domiciled in Luxembourg;
custodian means a body corporate that holds property for another person under a contractual arrangement, but excludes a depository;
depository means an Australian depository or a foreign depository;
Euroclear means the International Central Securities Depository service of Euroclear Bank SA/NV, a company located in Belgium;
external custody agreement means any custody arrangement entered into by an insurer which covers assets being held by a party other than the insurer. This includes both intra-group and fully external custody arrangements;
foreign depository means Euroclear, Clearstream and any similar facility outside Australia for the holding and trading of securities (whether debt or equity);
interest in a Special Purpose Vehicle (SPV) means:
(a) where the SPV is a company, a share; and
(b) where the SPV is a unit trust, a unit or similar interest;
locally incorporated insurer means an insurer that is incorporated in Australia;
managed investment scheme has the same meaning as in the Corporations Act 2001 (Corporations Act);
related bodies corporate means bodies corporate that are related to each other within the meaning of section 50 of the Corporations Act;
responsible entity has the same meaning as in the Corporations Act;
RITS means the system owned and operated by the Reserve Bank of Australia (RBA) for, among other things, the real time gross settlement of transfers between accounts of participating banks with RBA;
SPV means:
(a) a subsidiary of an insurer; or
(b) a unit trust in which an insurer has invested
where the predominant function of the subsidiary or trust is to hold an investment or investments (whether directly or indirectly) for the insurer (or for the insurer and one or more related bodies corporate of the insurer), but excludes:
(c) a managed investment scheme; and
(d) a trust where the entire interest of the relevant insurer as beneficiary in the trust is a proprietary interest in a particular asset or particular assets (rather than merely an interest in the due administration of the trust);[3]
sub-custodian means:
(a) a person to whom a custodian has contractually delegated the task of holding property for a customer of the custodian; and
(b) a person to whom a sub-custodian of the kind referred to in subparagraph (a) has contractually delegated the task of holding such property, or to whom that task has been further contractually delegated
but does not include a depository;
subsidiary has the same meaning as in the Corporations Act.
APRA may determine in writing, for the purposes of the definition of SPV, that the predominant function of a subsidiary or unit trust is to hold investments (whether directly or indirectly) for an insurer (or for the insurer and one or more related bodies corporate of the insurer), but a subsidiary or trust may fall within that definition even if APRA does not make such a determination.
Locally incorporated insurers
Intangibles and certain other assets
Amounts representing assets that must be deducted from capital under Prudential Standard GPS 110 Capital Adequacy (GPS 110) are excluded from being assets in Australia.
Chattels and real property
An amount representing a chattel or real property is excluded from being an asset in Australia if it is located outside Australia.
Loans and amounts due (including debentures)
An amount representing an asset is excluded from being an asset in Australia if:
Debt assets, not being debt assets held through a depository
(a) the asset is a debt owed by another person (including, but not limited to, a debenture or a bond), not being an asset that is held through a depository, and:
(i) the debt is payable outside Australia;
(ii) the debt is not recoverable in an Australian court;
(iii) the debtor is a body corporate and does not have a registered office in Australia within the meaning of the Corporations Act;
(iv) the debtor is a foreign government or foreign government authority;
(v) the debtor is a natural person who resides outside Australia; or
(vi) the debt is not readily transferable in Australia; or
Interests held on Australian depositories
(b) the asset is an interest held on an Australian depository, being an interest that derives from, or relates to, an underlying asset that is in the nature of a debt owed by another person, and:
(i) the underlying asset would be excluded from being an asset in Australia under subparagraph (a) if held directly by the locally incorporated insurer (rather than through a depository); and
(ii) APRA has not determined in writing to waive the exclusion of the asset or a class of assets of which the asset is a member; or
Interests held on foreign depositories
(c) the asset is an interest held on a foreign depository, being an interest that derives from or relates to an asset in the nature of a debt owed by another person.
Shares - general
An amount representing an asset is excluded from being an asset in Australia if:
Shares, not being shares held through a depository
(a) the asset is a share, not being a share that is held through a depository, and:
(i) the share is not readily transferable[4] in Australia; or
(ii) the share is not recorded on a register of members kept in Australia under section 169 of the Corporations Act; or
Interests held on Australian depositories
(b) the asset is an interest held on an Australian depository, being an interest that derives from, or relates to, a share (underlying share), and:
(i) the underlying share would be excluded from being an asset in Australia under subparagraph (a) if held directly by the locally incorporated insurer (rather than through a depository); and
(ii) APRA has not determined in writing to waive the exclusion of the asset or an asset of that kind; or
Shares held on foreign depositories
(c) the asset is an interest held on a foreign depository, being an interest that derives from or relates to a share.
(a) a locally incorporated insurer holds an interest in an SPV; and
(b) the SPV holds (whether directly or indirectly) an investment that would not be an asset in Australia if held directly by the insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act)
then an amount A is excluded from being an asset in Australia, where A is calculated as follows:
A = B/C x D
where:
B means the fair value of the investment held by the SPV that would not be an asset in Australia if held directly by the insurer;
C means the fair value of all the interests in the SPV; and
D means the fair value of the interests in the SPV held by the insurer.
For the purposes of paragraph 11, APRA may determine in writing that B has a specified value where APRA is satisfied that application of the formula would not fairly represent the underlying value to the insurer of the investment held by the SPV.[6]
Assets held by custodians
Paragraph 14 applies where a custodian holds:
(a) the legal title to an asset or assets on bare trust; or
(b) an asset or assets under an agreement of a kind determined in writing by APRA for the purposes of this paragraph.
An amount representing an interest in, or in relation to, an asset held by a custodian is excluded from being an asset in Australia if:
(a) the custodian does not have a registered office (within the meaning of the Corporations Act) in Australia;
(b) the insurer cannot enforce its rights against the custodian in an Australian court;
(c) the assets of the insurer are not kept distinct and separate from the custodian’s own assets;
(d) the external custody agreement entered into between the insurer and the custodian is not subject to the laws of a state or territory of Australia;
(e) the external custody agreement does not provide for liability on the part of the custodian arising from the acts or omissions on the part of the custodian, its agents or sub-custodians;
(f) the external custody agreement does not describe the process by which the insurer provides authorised instructions to the custodian;
(g) the external custody agreement does not describe the process by which the custodian provides periodic reports to the insurer;
(h) the external custody agreement does not provide for flexibility as to the rights and obligations of the parties to enable them to ensure compliance in the event of any changes to APRA’s prudential requirements[7] or other relevant legislation;
(i) the asset held by the custodian would not be an asset in Australia if it were held directly by the insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act);
(j) the asset held by the custodian is an interest in, or in relation to, an asset held by a sub-custodian, and the asset held by the sub-custodian would not be an asset in Australia if it were held directly by the insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act); or
(k) the custodian has the right to suspend or delay the transfer or realisation of the asset held by the custodian pending sale of any asset outside Australia.
Where an insurer has in place external custody agreements that:
(a) pre-date this Prudential Standard; and
(b) cannot be varied without undue difficulty,
it may apply to APRA to have these agreements treated as complying with subparagraphs 14(d), (e), (f), (g) and (h). APRA may grant approval in writing in respect of such an application and may subject the approval to conditions.
Interests in managed investment schemes
An amount representing an interest in a managed investment scheme is excluded from being an asset in Australia if:
(a) the responsible entity of the managed investment scheme is incorporated outside Australia;
(b) a trustee or custodian holds the assets of the managed investment scheme (scheme assets) and that person is not a body corporate that is incorporated in Australia;
(c) under the managed investment scheme, the trustee or responsible entity has the right to suspend or delay the redemption of the unit or trust property pending sale of any scheme assets outside Australia; or
(d) the insurer cannot enforce its rights in relation to the managed investment scheme in an Australian court.
Certain interests in trusts
An amount representing an equitable or a beneficial interest of a locally incorporated insurer in a trust (not being an interest arising where legal title is held by a custodian or an interest in a managed investment scheme) is excluded from being an asset in Australia if:
(a) the trustee is a body corporate and is incorporated outside Australia;
(b) the trustee is a natural person who resides outside Australia;
(c) under the trust deed, the trustee has the right to suspend or delay the redemption of a unit or trust property pending sale of any of the trust’s assets outside Australia; or
(d) the insurer cannot enforce its rights against the trustee in an Australian court.[8]
An amount representing an interest of a locally incorporated insurer in a trust (not being an interest arising where legal title is held by a custodian) is also excluded from being an asset in Australia where:
(a) the interest is a proprietary interest in a particular asset or particular assets (rather than merely an interest in the due administration of the trust); and
(b) the asset or each asset would not be an asset in Australia if it were held directly by the insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act).[9]
Other equitable interests
An amount representing an equitable interest in an asset (not being an equitable interest in property held under a managed investment scheme, or property held by a custodian, or property otherwise held on trust) is excluded from being an asset in Australia if:
(a) the legal owner of the asset (the legal owner) is a body corporate and is incorporated outside Australia;
(b) the legal owner of the asset is a natural person who resides outside Australia;
(c) the asset would not be an asset in Australia if it were held directly by the insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act); or
(d) the insurer cannot enforce its rights in relation to the asset in an Australian court.
Foreign insurers
Assets must be held by foreign insurer’s custodian or agent in Australia
An amount representing an asset of a foreign insurer is excluded from being an asset in Australia unless it is held for the foreign insurer by either:
(a) a custodian (in a way set out in subparagraph 13(a) or (b)), being a custodian that:
(i) has a registered office (within the meaning of the Corporations Act) in Australia and against whom the insurer can enforce its rights in Australia; and
(ii) has been appointed under a contract under which only the agent in Australia of the foreign insurer may give directions[10] (either directly or via a delegated authority to another person) to the custodian with regard to the disposal of assets; or
(b) the foreign insurer’s agent in Australia (on trust for the foreign insurer).
Assets must be of a kind that would not be excluded if held by a locally incorporated insurer
An amount representing an asset held for a foreign insurer in accordance with paragraph 20 is excluded from being an asset in Australia if the amount representing the asset would not be an asset in Australia if it were held directly by a locally incorporated insurer (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act).[11]
To facilitate the operation of paragraph 21, APRA may, where appropriate, exercise any power in the provisions of this Prudential Standard relating to locally incorporated insurers, as if an asset or assets held by a custodian or agent in Australia for a foreign insurer were instead held by or for a locally incorporated insurer.
Minimum Capital Requirement for foreign insurers
As noted in GPS 110, foreign insurers do not typically have capital instruments of the type specified in Attachment A to GPS 110. Foreign insurers are nevertheless required to meet a variant of the Minimum Capital Requirement (MCR). Specifically, foreign insurers are required to maintain assets in Australia, which exceed their liabilities in Australia[12] by an amount that is greater than their MCR.
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 (including the criteria in paragraphs 20 to 22 above and section 116A of the Act).
Repatriation of assets
An amount representing any expected repatriation of net assets in Australia by a foreign insurer out of the current year profits of its branch in Australia is excluded from being an asset in Australia.[13]
Asset revaluation reserves
An amount representing 55 per cent of:
(a) pre-tax revaluation reserves of each of the following:[14]
(i) property not held at fair value; and
(ii) investments of the foreign insurer in subsidiaries not held at fair value, other than subsidiaries that APRA deems part of an Extended Licensed Entity (ELE) (refer to GPS 110).
The amount recognised must be net of any fair value gains and losses and any gains or losses on hedges offsetting revaluations included in reserves; and
(b) the post-acquisition reserves of the foreign insurer’s associates[15] (which includes, under equity accounting, the foreign insurer’s share of undistributed profits, plus any share of asset revaluations in associates or any other revaluation of investments in associates. The amount recognised must be net of fair value gains and losses and any gains or losses on hedges offsetting revaluations of investments in associates included in reserves)[16]
is excluded from being an asset in Australia.
Provisions applying to locally incorporated insurers and foreign insurers
Other cases of foreign assets held through intermediate entities
Where:
(a) but for this paragraph, an amount representing an asset would be treated as an asset in Australia of an insurer; and
(b) that asset relates to an interest (underlying interest) which is held through one or more interposed entities (including, without limitation, trusts or companies, or a combination thereof); and
(c) the amount representing the underlying interest would not be an asset in Australia (either because it was excluded under some other part of this Prudential Standard or because it would not otherwise be an asset in Australia within the meaning of paragraph 28(a) of the Act) if the underlying interest were held directly by the insurer (or, in the case of a foreign insurer, if held directly by the foreign insurer’s custodian or agent in Australia)
then APRA may, having regard to the risk that the proceeds of the underlying interest may not be available in a winding up of the insurer in Australia, determine in writing that the amount is excluded from being an asset in Australia.
Attachment A
Transition provisions
An insurer may apply to APRA for exemption from compliance with any of the particular requirements of this Prudential Standard. APRA may grant an exemption for a period ending no later than 31 March 2007. APRA cannot exercise this discretion if it is satisfied that the failure of the insurer to be able to comply by the effective date is principally due to the inaction of the Board or management in making adequate preparations to comply with this Prudential Standard.
APRA may only grant an exemption where:
(a) the insurer has submitted the application to APRA at least 20 business days before the effective date;
(b) the insurer can demonstrate that, since the date on which this Prudential Standard was determined, it has been taking reasonable actions to ensure that it will be in a position to comply with this Prudential Standard by the effective date; and
(c) the insurer can demonstrate that since the date on which this Prudential Standard was determined, one of the following issues has given rise to the inability of the insurer to comply with this Prudential Standard by the effective date:
(i) an event has occurred, after this Prudential Standard was determined and outside the insurer’s control, that has led to it being in a position where it cannot comply with this Prudential Standard by the effective date; or
(ii) for a foreign insurer, it cannot comply with this Prudential Standard by the effective date due to delays caused, after this Prudential Standard was determined, by home country regulatory issues relating to a significant demonstrable inconsistency between this Prudential Standard and legal requirements imposed by its home country regulator.