The Australian Prudential Regulation Authority (APRA) has released final prudential standards and guidance on risk management and business continuity management for the life insurance industry, including friendly societies.

The standards and practice guides will be effective from 1 January 2008.

The standards provide a set of principles-based requirements for risk management and business continuity management. Institutions have the flexibility to develop their own approaches to meet the requirements in ways most suited to their business.

The standards place two minimum standards upon a life insurer regarding:

  • Risk Management (LPS 220)

  • Business Continuity Management (LPS 232).

The Prudential Practice Guides (PPGs) provide life insurers with guidance regarding:

  • Risk Management (LPG 200)

  • Operational Risk (LPG 230)

  • Life Insurance Risk and Life Reinsurance Management (LPG 240)

  • Asset and Liability Management Risk (LPG 250)

  • Conflicts of Interest under Section 48 (LPG 260)

  • Business Continuity Management (LPG 232).

The Standards are almost identical to the draft standards, apart from some minor changes outlined below:

LPS 220

  • The final standards for risk management have removed the provision allowing the Board of directors (the Board) to delegate authority to management to act on behalf of the Board in certain matters.

  • Under the risk management framework, the assessment of whether a risk is material must be considered at the level of the individual statutory fund as well as for the life company as a whole.

  • The Board must provide APRA with a Risk Management Declaration relating to each financial year of the life company, signed by two directors, or in the case of an eligible foreign life insurance company, two members of the compliance committee.

  • The final standards include transitional arrangements. Under these arrangements a life company may apply to APRA for relief from the provisions of LPS220. APRA may grant transitional relief by exempting the life company from the operation of the provisions, or by varying their operation in relation to a life company for a maximum of one year. APRA will only do so if satisfied:

    • there is no material detriment to policy owners

    • so that the life company will not be able to comply with the provisions of LPS220 by the effective date

    • the Board and senior management have made all reasonable attempts to comply with LPS220.

LPS 232

  • The final standards for business continuity management have also removed the provision allowing the Board of directors (the Board) to delegate authority to management to act on behalf of the Board in certain matters. However, the 'delegated management' is still referred to throughout the document.

LPG 200

  • The risk management framework for asset concentration risk no longer has to include a process for approving requests for temporary increases in limit. Rather, the risk management framework must include a process for dealing with breaches of limits, including a process to ensure excesses are brought within the pre-approved limits within a set timeframe.

LPG 250

  • The final practice guide clarifies that APRA does not expect the Appointed Actuary to undertake a full review or audit examination of the life company's risk management framework as part of the assessment of that framework required under LPS 220.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.