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Prudential Standard LPS 900

Consolidation of Prudential Rules

Nos. 15, 18, 22, 27 and 28

Objective of this prudential standard

This prudential standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act), with effect from 1 January 2008. It replaces the following Prudential Rules, which were made by the Insurance and Superannuation Commission between 1995 and 1996 under subsection 252(1) of the Act:

• Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2) & (3));
• Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4));
• Prudential Rules No. 22 Non-Participating Benefits (s 15(3));
• Prudential Rules No. 27 Starting Amount (s 61(1)); and
• Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)).

The text of the above Prudential Rules (as varied) has been retained in this prudential standard, except for the following references which have been removed because they are no longer relevant or applicable:

• the words “in Form R1 in the Schedule to the Prudential Rules made for the purposes of subsections 244(1) and (2) of the Act” at the end of paragraphs 4(c)(ii) and 8(b) of Prudential Rules No. 18; and
• Notes 2 and 3 at the end of Prudential Rules No. 22, which set out, respectively, the commencement day of Prudential Rules No. 22 and the revocation of the previous Prudential Rules for the purposes of subsection 15(3).

This prudential standard does not change any substantive aspect of the Prudential Rules. APRA intends that, as far as possible, life companies should comply with the Prudential Standard in the same way that they complied with the Prudential Rules.

This prudential standard also specifies, for the purposes of the Act, the maximum permissible amount of unsecured borrowings of a statutory fund.

Authority

This Prudential Standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act).

Application

This Prudential Standard applies to all life companies, other than friendly societies, registered under the Act.

Part 1

A. References to Prudential Rules No. 15

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2) & (3)) is to be taken as a reference to Section B of this Part.

B. Consequences of Transfer of Policy Between Statutory Funds

For the purposes of subsections 55(2) and (3) of the Act:

1. The part of the liabilities (including policy liabilities) of the company, mentioned in subsection 55(2) of the Act, must be ascertained in a manner which, in the opinion of the appointed actuary, will not result in unfairness to the owners of the policies that remain referable to a fund or to the owners of the policies that cease to be referable to that fund (particularly having regard to the nature of the assets to be transferred).

2. A notice mentioned in subsection 55(3) of the Act must:

(a) be in writing; and

(b) set out:

(i) the identifying details of the policy; and

(ii) the identity of all the statutory funds to which the policy is or has become referable; and

(iii) the identity of all the statutory funds to which the policy has ceased to be referable; and

(iv) the date on which the policy became referable to the fund or funds to which it has become referable; and

(v) where the policy is referable to 2 or more statutory funds:

(A) the benefits under the policy that are to be provided out of each fund; and

(B) either:

(I) the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund; or

(II) the way in which that proportion is to be calculated; and

(c) be given to the policy owner within 6 weeks after the occurrence of whichever of the circumstances described in paragraphs 55(3)(a) and 55(3)(b) is applicable.

Part 2

A. References to Prudential Rules No. 18

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4)) is to be taken as a reference to Section B of this Part.

B. Single Bank Account for Statutory Funds

For the purposes of subsection 34(4) of the Act:

The bank account must be maintained in accordance with the following standards:

1. A statutory fund account must be established in the records of the life company in respect of each statutory fund in respect of which the bank account is maintained.

2. The statutory fund account must be a current account (or ledger) that records, as accounting entries, drawings from and receipts by the bank account in respect of the statutory fund.

3. The drawings and receipts must be balanced by offsetting entries in both the bank account and the statutory fund account.

4. The balancing must be carried out not less frequently than once every 7 days, except that:

(a) in the case of drawings or receipts relating to investment-linked contracts, the balancing must be carried out not less frequently than the frequency at which the unit prices relevant to the contract concerned are quoted by the person managing the unitised investment concerned, and in any event not less frequently than once every 7 days;

(b) in the case of drawings or receipts that:

(i) do not relate to any particular policy; and

(ii) need to be apportioned between statutory funds (other than as provided for in section 35 of the Act in relation to policies referable to more than one statutory fund);

if, as at the beginning of 20 December 1995, the life company’s practice is to carry out such balancing less frequently than once every 7 days, then, until the end of 31 December 1996, the balancing may be carried out not less frequently than once every 28 days;

(c) in the case of drawings or receipts of amounts that are less than or equal to the greater of:

(i) $500,000; or

(ii) 1% of the value of the assets of the statutory fund as last reported to APRA;

the balancing may be carried out not less frequently than once every 28 days.

5. A debit balance in the statutory fund account must be recorded as a “sundry debtor”, and a credit balance as a “sundry creditor”.

6. Interest must accrue daily on any balance (whether credit or debit) in the statutory fund account, at a rate that the company believes, on reasonable grounds, is fair and reasonable to the policyholders whose policies are referable to the statutory fund having regard to the interest earned by the bank account.

7. The net position of all the statutory fund accounts in aggregate must be reconciled not less frequently than once every 28 days. When so reconciled the net position must be equal to the balance of the bank account at that time.

8. If, at any time, the balance (whether credit or debit) in a statutory fund account comes to exceed the greater of:

(a) $500,000; or

(b) 1% of the value of the assets of the statutory fund as last reported to APRA;

the company must, in writing, within 28 days after that time, tell APRA and give APRA particulars of the transactions that caused the balance to exceed the applicable amount.

Part 3

A. References to Prudential Rules No. 22

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 22 Non-Participating Benefits (s 15(3)) is to be taken as a reference to Section B of this Part.

B. Non-Participating Benefits

For the purposes of subsection 15(3) of the Act, the following benefits are non-participating benefits:

Policies insuring multiple lives with limited form of profit sharing

1. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy that does not have any investment component;

(b) a group of 2 or more people are insured by the policy against the same contingencies;

(c) the benefit has the features mentioned in paragraph 15(2)(b) of the Act;

(d) the benefit includes an entitlement to share in a distribution by the life company of profits or surplus, but only by way of repayment of premiums previously paid or reduction of future premiums;

(e) the amount of the entitlement is determined by reference to the history of claims made under one or both of the following:

(i) the policy;

(ii) policies of the same kind as the policy.

Investment-linked contracts

2. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment-linked benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (d)(ii) are set out in the policy document.

Investment account contracts

3. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the interest payable on the account is dependent on, or to be ascertained according to, a decision of the company:

(i) the benefit is provided for by a policy that belongs to a particular subcategory of life insurance business; and

(ii) no other kind of policy is contained within that subcategory; and

(iii) the net investment earnings (including realised and unrealised gains) of the assets administered for the purposes of that subcategory are credited to the policies belonging to that subcategory; and

(iv) the aggregate value of the accounts under the policies belonging to that subcategory does not, and will not at any time, exceed 103% of the value of the assets administered for the purposes of that subcategory; and

(v) the aggregate value of those accounts does not, and will not at any time, fall below 95% of the value of the assets administered for the purposes of that subcategory;

(e) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount – do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(f) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or more of the following:

(i) the interest payable on the account;

(ii) the charges payable under the policy;

(iii) the surrender value of the policy;

(g) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies other than investment-linked or investment account contracts

4. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is not an investment-linked benefit or an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or both of the following:

(i) the charges payable under the policy;

(ii) the surrender value of the policy;

(f) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies providing rolling fixed rates for fixed terms

5. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(b) the policy:

(i) provides for a benefit in respect of each of 2 or more consecutive specified periods occurring during the term of the policy; and

(ii) provides that the benefit in respect of each of the specified periods is to be determined at or before the commencement of the period; and

(iii) gives the policyholder the option, at or before the end of each of the specified periods that end before the expiry of the term of the policy, to surrender the policy; and

(iv) does not provide for any benefits other than those mentioned in subparagraph (i);

(c) if the benefit in respect of each of the specified periods were the only benefit provided for by the policy, that benefit would be a non-participating benefit by virtue of:

(i) subsection 15(2) of the Act; or

(ii) these prudential standards;

(d) the circumstances in which and the conditions subject to which the company may make a determination mentioned in subparagraph (b)(ii) are set out in the policy document.

Transitional

6. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy issued by the life company before 1 January 1996;

(b) the policy is a kind of policy which the company had available for issue on 30 June 1995 (in circumstances where all pre-conditions under the Life Insurance Act 1945 to the issuing of that kind of policy were satisfied);

(c) if the policy had been issued at the end of 30 June 1995, it would not have been a participating policy within the meaning of the Life Insurance Act 1945 (as then in force).

Note: To avoid doubt, in this standard “charges” includes fees.

Part 4

A. References to Prudential Rules No. 27

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 27 Starting Amount (s 61(1)) is to be taken as a reference to Section B of this Part.

B. Starting Amount

For the purposes of subsection 61(1) of the Act:

Interpretation - general

1. The definitions in paragraphs 2 to 8 apply for the purposes of this standard.

Meaning of “starting date”

2. The “starting date” is the first day of the life company’s first financial year ending on or after 31 December 1996.

Meaning of “preceding financial year”

3. The “preceding financial year” is the life company’s financial year ending immediately before the starting date.

Meaning of “transitional actuarial standard”

4. The “transitional actuarial standard” is the Actuarial Standard for Valuation of Policy Liabilities which is contained in the set of actuarial standards entitled “Transitional Provisions for the Valuation of Policy Liabilities, Solvency and Capital Adequacy Standards and Calculation of Paid Up Values and Surrender Values” issued June 1995 by the Life Insurance Actuarial Standards Board.

Meaning of “aggregate retained profits”

5. The “aggregate retained profits” of a category of business of a statutory fund is an amount worked out in accordance with the following formula:

net assets of category  policy liabilities of category

where:

“net assets of category” means the net assets of the category determined in accordance with paragraph 6;

“policy liabilities of category” means the policy liabilities of the category as at the starting date determined in accordance with actuarial standard AS1.01 issued October 1996 by the Life Insurance Actuarial Standards Board.

Meaning of “net assets” in paragraph 5

6. For the purposes of paragraph 5, the “net assets” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the assets and liabilities of the category as at the end of the preceding financial year - an amount worked out in accordance with the following formula:

assets of category  liabilities of category  shareholders’ capital of category

where:

“assets of category” means the value of the assets of the category as at the end of the preceding financial year;

“liabilities of category” means the liabilities of the category, other than the policy liabilities of the category determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“shareholders’ capital of category” means the shareholders’ capital of the category determined in accordance with paragraph 8;

(b) in every other case - an amount worked out in accordance with the following formula:

(assets of fund  liabilities of fund  aggregate shareholders’ capital of fund)

 (policy liabilities of category  policy liabilities of fund)

where:

“assets of fund” means the value of the assets of the statutory fund as at the end of the preceding financial year;

“liabilities of fund” means the liabilities of the statutory fund, other than the policy liabilities of the statutory fund determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“aggregate shareholders’ capital of fund” means the aggregate shareholders’ capital of the statutory fund as at the end of the preceding financial year determined in accordance with paragraph 7;

“policy liabilities of category” means the policy liabilities of the category as at the end of the preceding financial year determined in accordance with the transitional actuarial standard;

“policy liabilities of fund” means the policy liabilities of the statutory fund as at the end of the preceding financial year determined in accordance with the transitional actuarial standard.

Meaning of “aggregate shareholders’ capital”

7. The “aggregate shareholders’ capital” of a statutory fund is the sum of the shareholders’ capital of each category of business of the statutory fund determined in accordance with paragraph 8.

Meaning of “shareholders’ capital” in paragraphs 6 and 7

8. For the purposes of paragraphs 6 and 7, the “shareholders’ capital” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the shareholders’ capital of the category as at the end of the preceding financial year – the shareholders’ capital of the category as at the end of the preceding financial year;

(b) in every other case - nil.

Starting amount for Australian policy owners’ retained profits

9. For the purposes of the definition of “Australian policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as:

(A) the life company determines; and

(B) is at least 80%, or such higher percentage as is specified in the life company’s articles of association, of those aggregate retained profits; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund; and

(C) is to be taken as the starting amount; and

(ii) is approved in writing by APRA for the purposes of this standard.

Starting amount for overseas policy owners’ retained profits

10. For the purposes of the definition of “overseas policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing overseas participating business as:

(A) the life company determines; and

(B) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(1) the life company’s articles of association; or

(2) any foreign regulatory requirements applying to the life company; and

(C) is not less than the amount of profits that is required to be allocated to overseas policy owners’ retained profits by:

(1) the life company’s articles of association; or

(2) any foreign regulatory requirements applying to the life company; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund; and

(C) is to be taken as the starting amount; and

(ii) is approved in writing by APRA for the purposes of this standard.

Starting amount for shareholders’ retained profits (Australian participating)

11. For the purposes of the definition of “shareholders’ retained profits (Australian participating)” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as is not allocated to the starting amount for Australian policy owners’ retained profits under paragraph 9; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) 25% of the starting amount for Australian policy owners’ retained profits determined under paragraph 9.

Starting amount for shareholders’ retained profits (overseas and non-participating)

12. For the purposes of the definition of “shareholders’ retained profits (overseas and non- participating)” in subsection 61(1) of the Act, the starting amount is the sum of:

(a) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business as:

(i) the life company determines; and

(ii) is not allocated to retained profits under paragraphs 9 to 11; and

(b) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines.

Starting amount for shareholders’ capital

13. For the purposes of the definition of “shareholders’ capital” in subsection 61(1) of the Act, the starting amount is the sum of:

(a) the aggregate shareholders’ capital of the statutory fund; and

(b) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business or non-participating business as is not allocated to retained profits under paragraphs 9 to 12.

Aggregate retained profits not to be allocated more than once

14. To avoid doubt, the sum of the amounts of aggregate retained profits of a category of business that are allocated to the starting amounts mentioned in paragraphs 9 to 13 must not exceed the total aggregate retained profits of the category.

Part 5

A. References to Prudential Rules No. 28

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)) is to be taken as a reference to Section B of this Part.

B. Distribution of Shareholders’ Retained Profits (Australian Participating)

For the purposes of subsection 62(5) of the Act:

The distribution of shareholders’ retained profits (Australian participating) from a statutory fund is prohibited if:

(a) there is not, at the same time, a distribution of Australian policy owners’ retained profits from the statutory fund; and

(b) immediately after the distribution, the shareholders’ retained profits (Australian participating) of the statutory fund that remain undistributed are less than 25% (or such lower percentage as is specified in the life company’s articles of association) of the Australian policy owners’ retained profits of the statutory fund that remain undistributed.

Part 6

Unsecured borrowings of a statutory fund

1 For the purposes of subsection 38(4) of the Act, a life company must not borrow money by means of unsecured borrowing, for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.

where “free assets”, in relation to a statutory fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.

Consolidation of Prudential Rules

Nos. 15, 18, 22, 27 and 28

Objective of this prudential standard

This prudential standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act), with effect from 1 January 2008. It replaces the following Prudential Rules, which were made by the Insurance and Superannuation Commission between 1995 and 1996 under subsection 252(1) of the Act:

• Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2) & (3));
• Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4));
• Prudential Rules No. 22 Non-Participating Benefits (s 15(3));
• Prudential Rules No. 27 Starting Amount (s 61(1)); and
• Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)).

The text of the above Prudential Rules (as varied) has been retained in this prudential standard, except for the following references which have been removed because they are no longer relevant or applicable:

• the words “in Form R1 in the Schedule to the Prudential Rules made for the purposes of subsections 244(1) and (2) of the Act” at the end of paragraphs 4(c)(ii) and 8(b) of Prudential Rules No. 18; and
• Notes 2 and 3 at the end of Prudential Rules No. 22, which set out, respectively, the commencement day of Prudential Rules No. 22 and the revocation of the previous Prudential Rules for the purposes of subsection 15(3).

This prudential standard does not change any substantive aspect of the Prudential Rules. APRA intends that, as far as possible, life companies should comply with the Prudential Standard in the same way that they complied with the Prudential Rules.

This prudential standard also specifies, for the purposes of the Act, the maximum permissible amount of unsecured borrowings of a statutory fund.

Authority

This Prudential Standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act).

Application

This Prudential Standard applies to all life companies, other than friendly societies, registered under the Act.

Part 1

A. References to Prudential Rules No. 15

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2) & (3)) is to be taken as a reference to Section B of this Part.

B. Consequences of Transfer of Policy Between Statutory Funds

For the purposes of subsections 55(2) and (3) of the Act:

1. The part of the liabilities (including policy liabilities) of the company, mentioned in subsection 55(2) of the Act, must be ascertained in a manner which, in the opinion of the appointed actuary, will not result in unfairness to the owners of the policies that remain referable to a fund or to the owners of the policies that cease to be referable to that fund (particularly having regard to the nature of the assets to be transferred).

2. A notice mentioned in subsection 55(3) of the Act must:

(a) be in writing; and

(b) set out:

(i) the identifying details of the policy; and

(ii) the identity of all the statutory funds to which the policy is or has become referable; and

(iii) the identity of all the statutory funds to which the policy has ceased to be referable; and

(iv) the date on which the policy became referable to the fund or funds to which it has become referable; and

(v) where the policy is referable to 2 or more statutory funds:

(A) the benefits under the policy that are to be provided out of each fund; and

(B) either:

(I) the proportion of the premium that is related to the benefits to be provided out of each fund and is to be credited to the fund; or

(II) the way in which that proportion is to be calculated; and

(c) be given to the policy owner within 6 weeks after the occurrence of whichever of the circumstances described in paragraphs 55(3)(a) and 55(3)(b) is applicable.

Part 2

A. References to Prudential Rules No. 18

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4)) is to be taken as a reference to Section B of this Part.

B. Single Bank Account for Statutory Funds

For the purposes of subsection 34(4) of the Act:

The bank account must be maintained in accordance with the following standards:

1. A statutory fund account must be established in the records of the life company in respect of each statutory fund in respect of which the bank account is maintained.

2. The statutory fund account must be a current account (or ledger) that records, as accounting entries, drawings from and receipts by the bank account in respect of the statutory fund.

3. The drawings and receipts must be balanced by offsetting entries in both the bank account and the statutory fund account.

4. The balancing must be carried out not less frequently than once every 7 days, except that:

(a) in the case of drawings or receipts relating to investment-linked contracts, the balancing must be carried out not less frequently than the frequency at which the unit prices relevant to the contract concerned are quoted by the person managing the unitised investment concerned, and in any event not less frequently than once every 7 days;

(b) in the case of drawings or receipts that:

(i) do not relate to any particular policy; and

(ii) need to be apportioned between statutory funds (other than as provided for in section 35 of the Act in relation to policies referable to more than one statutory fund);

if, as at the beginning of 20 December 1995, the life company’s practice is to carry out such balancing less frequently than once every 7 days, then, until the end of 31 December 1996, the balancing may be carried out not less frequently than once every 28 days;

(c) in the case of drawings or receipts of amounts that are less than or equal to the greater of:

(i) $500,000; or

(ii) 1% of the value of the assets of the statutory fund as last reported to APRA;

the balancing may be carried out not less frequently than once every 28 days.

5. A debit balance in the statutory fund account must be recorded as a “sundry debtor”, and a credit balance as a “sundry creditor”.

6. Interest must accrue daily on any balance (whether credit or debit) in the statutory fund account, at a rate that the company believes, on reasonable grounds, is fair and reasonable to the policyholders whose policies are referable to the statutory fund having regard to the interest earned by the bank account.

7. The net position of all the statutory fund accounts in aggregate must be reconciled not less frequently than once every 28 days. When so reconciled the net position must be equal to the balance of the bank account at that time.

8. If, at any time, the balance (whether credit or debit) in a statutory fund account comes to exceed the greater of:

(a) $500,000; or

(b) 1% of the value of the assets of the statutory fund as last reported to APRA;

the company must, in writing, within 28 days after that time, tell APRA and give APRA particulars of the transactions that caused the balance to exceed the applicable amount.

Part 3

A. References to Prudential Rules No. 22

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 22 Non-Participating Benefits (s 15(3)) is to be taken as a reference to Section B of this Part.

B. Non-Participating Benefits

For the purposes of subsection 15(3) of the Act, the following benefits are non-participating benefits:

Policies insuring multiple lives with limited form of profit sharing

1. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy that does not have any investment component;

(b) a group of 2 or more people are insured by the policy against the same contingencies;

(c) the benefit has the features mentioned in paragraph 15(2)(b) of the Act;

(d) the benefit includes an entitlement to share in a distribution by the life company of profits or surplus, but only by way of repayment of premiums previously paid or reduction of future premiums;

(e) the amount of the entitlement is determined by reference to the history of claims made under one or both of the following:

(i) the policy;

(ii) policies of the same kind as the policy.

Investment-linked contracts

2. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment-linked benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (d)(ii) are set out in the policy document.

Investment account contracts

3. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the interest payable on the account is dependent on, or to be ascertained according to, a decision of the company:

(i) the benefit is provided for by a policy that belongs to a particular subcategory of life insurance business; and

(ii) no other kind of policy is contained within that subcategory; and

(iii) the net investment earnings (including realised and unrealised gains) of the assets administered for the purposes of that subcategory are credited to the policies belonging to that subcategory; and

(iv) the aggregate value of the accounts under the policies belonging to that subcategory does not, and will not at any time, exceed 103% of the value of the assets administered for the purposes of that subcategory; and

(v) the aggregate value of those accounts does not, and will not at any time, fall below 95% of the value of the assets administered for the purposes of that subcategory;

(e) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount – do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(f) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or more of the following:

(i) the interest payable on the account;

(ii) the charges payable under the policy;

(iii) the surrender value of the policy;

(g) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies other than investment-linked or investment account contracts

4. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is not an investment-linked benefit or an investment account benefit;

(b) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(c) the amount of the benefit is to be calculated according to a formula that:

(i) is set out in the policy document; and

(ii) includes an element that is dependent on, or to be ascertained according to, a decision of the life company;

(d) if the charges payable under the policy are dependent on, or to be ascertained according to, a decision of the company, those charges as determined by or ascertained according to the decision of the company:

(i) are specified as a dollar amount, a percentage, or a combination of a dollar amount and a percentage; and

(ii) to the extent that the charges are specified as a dollar amount - do not exceed the charges, specified as a dollar amount, that applied when the policy was issued, increased in accordance with a formula or index relating to price variations that the company believes, on reasonable grounds, operates fairly and reasonably in the circumstances (for example, a consumer price index published by the Australian Bureau of Statistics); and

(iii) to the extent that the charges are specified as a percentage - do not exceed twice the specified percentage that applied when the policy was issued;

(e) the only elements of the formula mentioned in paragraph (c) that are dependent on, or to be ascertained according to, a decision of the company are one or both of the following:

(i) the charges payable under the policy;

(ii) the surrender value of the policy;

(f) the circumstances in which and the conditions subject to which the company may make a decision mentioned in subparagraph (c)(ii) are set out in the policy document.

Policies providing rolling fixed rates for fixed terms

5. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit has the features mentioned in paragraph 15(2)(a) of the Act;

(b) the policy:

(i) provides for a benefit in respect of each of 2 or more consecutive specified periods occurring during the term of the policy; and

(ii) provides that the benefit in respect of each of the specified periods is to be determined at or before the commencement of the period; and

(iii) gives the policyholder the option, at or before the end of each of the specified periods that end before the expiry of the term of the policy, to surrender the policy; and

(iv) does not provide for any benefits other than those mentioned in subparagraph (i);

(c) if the benefit in respect of each of the specified periods were the only benefit provided for by the policy, that benefit would be a non-participating benefit by virtue of:

(i) subsection 15(2) of the Act; or

(ii) these prudential standards;

(d) the circumstances in which and the conditions subject to which the company may make a determination mentioned in subparagraph (b)(ii) are set out in the policy document.

Transitional

6. A benefit in respect of which all the following conditions are satisfied:

(a) the benefit is provided for by a policy issued by the life company before 1 January 1996;

(b) the policy is a kind of policy which the company had available for issue on 30 June 1995 (in circumstances where all pre-conditions under the Life Insurance Act 1945 to the issuing of that kind of policy were satisfied);

(c) if the policy had been issued at the end of 30 June 1995, it would not have been a participating policy within the meaning of the Life Insurance Act 1945 (as then in force).

Note: To avoid doubt, in this standard “charges” includes fees.

Part 4

A. References to Prudential Rules No. 27

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 27 Starting Amount (s 61(1)) is to be taken as a reference to Section B of this Part.

B. Starting Amount

For the purposes of subsection 61(1) of the Act:

Interpretation - general

1. The definitions in paragraphs 2 to 8 apply for the purposes of this standard.

Meaning of “starting date”

2. The “starting date” is the first day of the life company’s first financial year ending on or after 31 December 1996.

Meaning of “preceding financial year”

3. The “preceding financial year” is the life company’s financial year ending immediately before the starting date.

Meaning of “transitional actuarial standard”

4. The “transitional actuarial standard” is the Actuarial Standard for Valuation of Policy Liabilities which is contained in the set of actuarial standards entitled “Transitional Provisions for the Valuation of Policy Liabilities, Solvency and Capital Adequacy Standards and Calculation of Paid Up Values and Surrender Values” issued June 1995 by the Life Insurance Actuarial Standards Board.

Meaning of “aggregate retained profits”

5. The “aggregate retained profits” of a category of business of a statutory fund is an amount worked out in accordance with the following formula:

net assets of category  policy liabilities of category

where:

“net assets of category” means the net assets of the category determined in accordance with paragraph 6;

“policy liabilities of category” means the policy liabilities of the category as at the starting date determined in accordance with actuarial standard AS1.01 issued October 1996 by the Life Insurance Actuarial Standards Board.

Meaning of “net assets” in paragraph 5

6. For the purposes of paragraph 5, the “net assets” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the assets and liabilities of the category as at the end of the preceding financial year - an amount worked out in accordance with the following formula:

assets of category  liabilities of category  shareholders’ capital of category

where:

“assets of category” means the value of the assets of the category as at the end of the preceding financial year;

“liabilities of category” means the liabilities of the category, other than the policy liabilities of the category determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“shareholders’ capital of category” means the shareholders’ capital of the category determined in accordance with paragraph 8;

(b) in every other case - an amount worked out in accordance with the following formula:

(assets of fund  liabilities of fund  aggregate shareholders’ capital of fund)

 (policy liabilities of category  policy liabilities of fund)

where:

“assets of fund” means the value of the assets of the statutory fund as at the end of the preceding financial year;

“liabilities of fund” means the liabilities of the statutory fund, other than the policy liabilities of the statutory fund determined in accordance with the transitional actuarial standard, as at the end of the preceding financial year;

“aggregate shareholders’ capital of fund” means the aggregate shareholders’ capital of the statutory fund as at the end of the preceding financial year determined in accordance with paragraph 7;

“policy liabilities of category” means the policy liabilities of the category as at the end of the preceding financial year determined in accordance with the transitional actuarial standard;

“policy liabilities of fund” means the policy liabilities of the statutory fund as at the end of the preceding financial year determined in accordance with the transitional actuarial standard.

Meaning of “aggregate shareholders’ capital”

7. The “aggregate shareholders’ capital” of a statutory fund is the sum of the shareholders’ capital of each category of business of the statutory fund determined in accordance with paragraph 8.

Meaning of “shareholders’ capital” in paragraphs 6 and 7

8. For the purposes of paragraphs 6 and 7, the “shareholders’ capital” of a category of business of a statutory fund is:

(a) if the life company’s audited financial statements specify the shareholders’ capital of the category as at the end of the preceding financial year – the shareholders’ capital of the category as at the end of the preceding financial year;

(b) in every other case - nil.

Starting amount for Australian policy owners’ retained profits

9. For the purposes of the definition of “Australian policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as:

(A) the life company determines; and

(B) is at least 80%, or such higher percentage as is specified in the life company’s articles of association, of those aggregate retained profits; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the Australian participating business of the statutory fund; and

(C) is to be taken as the starting amount; and

(ii) is approved in writing by APRA for the purposes of this standard.

Starting amount for overseas policy owners’ retained profits

10. For the purposes of the definition of “overseas policy owners’ retained profits” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing overseas participating business as:

(A) the life company determines; and

(B) can be allocated to overseas policy owners’ retained profits on a basis that is not inconsistent with:

(1) the life company’s articles of association; or

(2) any foreign regulatory requirements applying to the life company; and

(C) is not less than the amount of profits that is required to be allocated to overseas policy owners’ retained profits by:

(1) the life company’s articles of association; or

(2) any foreign regulatory requirements applying to the life company; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) an amount that:

(i) in the appointed actuary’s reasonable opinion:

(A) is consistent with the history and structure of the business of the statutory fund; and

(B) secures the reasonable benefit expectations of the policy owners in relation to the overseas participating business of the statutory fund; and

(C) is to be taken as the starting amount; and

(ii) is approved in writing by APRA for the purposes of this standard.

Starting amount for shareholders’ retained profits (Australian participating)

11. For the purposes of the definition of “shareholders’ retained profits (Australian participating)” in subsection 61(1) of the Act, the starting amount is the lower of the following amounts:

(a) the sum of:

(i) such part of the aggregate retained profits of the category of business of the statutory fund representing Australian participating business as is not allocated to the starting amount for Australian policy owners’ retained profits under paragraph 9; and

(ii) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines;

(b) 25% of the starting amount for Australian policy owners’ retained profits determined under paragraph 9.

Starting amount for shareholders’ retained profits (overseas and non-participating)

12. For the purposes of the definition of “shareholders’ retained profits (overseas and non- participating)” in subsection 61(1) of the Act, the starting amount is the sum of:

(a) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business as:

(i) the life company determines; and

(ii) is not allocated to retained profits under paragraphs 9 to 11; and

(b) such part of the aggregate retained profits of the category of business of the statutory fund representing non-participating business as the life company determines.

Starting amount for shareholders’ capital

13. For the purposes of the definition of “shareholders’ capital” in subsection 61(1) of the Act, the starting amount is the sum of:

(a) the aggregate shareholders’ capital of the statutory fund; and

(b) such part of the aggregate retained profits of each category of business of the statutory fund representing participating business or non-participating business as is not allocated to retained profits under paragraphs 9 to 12.

Aggregate retained profits not to be allocated more than once

14. To avoid doubt, the sum of the amounts of aggregate retained profits of a category of business that are allocated to the starting amounts mentioned in paragraphs 9 to 13 must not exceed the total aggregate retained profits of the category.

Part 5

A. References to Prudential Rules No. 28

Any reference in the Prudential Rules or prudential standards to Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)) is to be taken as a reference to Section B of this Part.

B. Distribution of Shareholders’ Retained Profits (Australian Participating)

For the purposes of subsection 62(5) of the Act:

The distribution of shareholders’ retained profits (Australian participating) from a statutory fund is prohibited if:

(a) there is not, at the same time, a distribution of Australian policy owners’ retained profits from the statutory fund; and

(b) immediately after the distribution, the shareholders’ retained profits (Australian participating) of the statutory fund that remain undistributed are less than 25% (or such lower percentage as is specified in the life company’s articles of association) of the Australian policy owners’ retained profits of the statutory fund that remain undistributed.

Part 6

Unsecured borrowings of a statutory fund

1 For the purposes of subsection 38(4) of the Act, a life company must not borrow money by means of unsecured borrowing, for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under all unsecured borrowing relating to the fund would exceed 50% of the free assets of the fund.

where “free assets”, in relation to a statutory fund, means the amount that would be left from the total assets of the fund after deducting the amount required to meet the capital adequacy standard, within the meaning of the prudential standards, of the fund.

Objective of this prudential standard

This prudential standard is made under subsection 230A(1) of the Life Insurance Act 1995 (the Act), with effect from 1 January 2008. It replaces the following Prudential Rules, which were made by the Insurance and Superannuation Commission between 1995 and 1996 under subsection 252(1) of the Act:

• Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2) & (3));
• Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4));
• Prudential Rules No. 22 Non-Participating Benefits (s 15(3));
• Prudential Rules No. 27 Starting Amount (s 61(1)); and
• Prudential Rules No. 28 Distribution of Shareholders’ Retained Profits (Australian Participating) (s 62(5)).

The text of the above Prudential Rules (as varied) has been retained in this prudential standard, except for the following references which have been removed because they are no longer relevant or applicable:

• the words “in Form R1 in the Schedule to the Prudential Rules made for the purposes of subsections 244(1) and (2) of the Act” at the end of paragraphs 4(c)(ii) and 8(b) of Prudential Rules No. 18; and
• Notes 2 and 3 at the end of Prudential Rules No. 22, which set out, respectively, the commencement day of Prudential Rules No. 22 and the revocation of the previous Prudential Rules for the purposes of subsection 15(3).

This prudential standard does not change any substantive aspect of the Prudential Rules. APRA intends that, as far as possible, life companies should comply with the Prudential Standard in the same way that they complied with the Prudential Rules.

This prudential standard also specifies, for the purposes of the Act, the maximum permissible amount of unsecured borrowings of a statutory fund.