Part 1 Preliminary
These Rules are the Private Health Insurance (Health Benefits Fund Administration) Rules 2007.
These Rules commence:
(a) if the Rules are registered before the Act commences?at the same time as the Act commences; or
(b) if the Rules are registered on or after the day on which the Act commences?on the date on which the Rules are registered,
whichever occurs first.
Note: Terms used in these Rules have the same meaning as in the Act?see section 13 of the Legislative Instruments Act 2003. These terms include:
appointed actuary
approved form
assets
capital adequacy direction
capital adequacy standard
Council
cover
health care provider
health benefits fund
health-related business
net asset position
policy group
policy holder
private health insurer
officer [of a private health insurer]
referable
risk equalisation levy
Risk Equalisation Trust Fund
rules [of an insurer]
solvency direction
solvency standard
terminating management
In these Rules:
Act means the Private Health Insurance Act 2007.
insurer means a private health insurer.
Regulations means any regulations made under the Act.
Rules means the Rules made under the Act including these Rules.
subordinated debt means a debt facility that meets the requirements of Part 9 of Schedule 2 of these Rules.
Part 2 Expenditure and application of health benefits funds
(1) For the purposes of paragraph 137-10 (3) (b) of the Act, the purpose for which an insurer may mortgage or charge an asset of a health benefits fund, or funds, conducted by the insurer is that the mortgage or charge is for the sole purpose of the benefit of the business of the fund or funds.
(2) A mortgage or charge referred to in subrule (1) is subject to the conditions that it:
(a) only secures a borrowing that is permitted under these Rules; and
(b) does not secure a liability that is not a liability incurred, or to be incurred, by the fund, or funds, for the business of the fund or funds; and
(c) will not adversely impact on the insurer's ability to:
(i) maintain the capital adequacy of the fund in accordance with the capital adequacy standard; or
(ii) comply with a capital adequacy direction given to the insurer; or
(iii) maintain the standards of solvency in accordance with the solvency standard; or
(iv) comply with a solvency direction given to the insurer.
(3) A mortgage or charge is subject to the condition that:
(a) the mortgage or charge complies with the insurer's risk management statements or policies that have been developed with the advice of the insurer's appointed actuary and approved by the board of the insurer; or
(b) before entering into the transaction for the mortgage or charge, the insurer obtains and considers advice from its appointed actuary on the matters referred to in subrule (2) in respect of that mortgage or charge.
Note: Section 137-15 of the Act provides that a transaction entered into in contravention of section 137-10 is of no effect unless the Federal Court makes an order in respect of the transaction, or the transaction is included in a class of transactions specified in these Rules to be transactions to which section 137-15 of the Act applies.
(1) For subsection 137-10 (4) of the Act, an insurer must not borrow money for the purposes of the business of a health benefits fund conducted by the insurer unless the borrowing is:
(a) by way of a subordinated debt; or
Note: Subordinated debt is defined in rule 3.
(b) by means of a bank overdraft; or
(c) to cover settlement of a transaction for the acquisition of an asset that is to be an asset of the fund, but only where the period of the borrowing does not exceed 90 days and the amount borrowed does not exceed 10% of the value of the assets of the fund following the acquisition; or
(d) otherwise, for the sole purpose of the benefit of the business of the fund, but only where the borrowing would not result in the total amount of principal outstanding under all borrowings, excluding the amount of a subordinate debt, exceeding the greater of 10% of the assets of the fund or 50% of the amount of free assets of the fund.
(2) In this rule, free assets of the fund means assets in excess of the capital adequacy and solvency requirements in accordance with the capital adequacy standard and solvency standard.
Note: Section 137-15 of the Act provides that a transaction entered into in contravention of section 137-10 is of no effect unless the Federal Court makes an order in respect of the transaction, or the transaction is included in a class of transactions specified in these Rules to be transactions to which section 137-15 of the Act applies.
Part 3 Restructure of health benefits funds
(1) An insurer may apply to the Council in the approved form for approval under section 146-1 of the Act of a restructure of its health benefits fund or funds.
(2) In the application, the insurer must set out the restructure proposal (the restructure proposal) by:
(a) identifying the date on which, subject to the Council's approval and compliance with the requirements of the Act, the Regulations and the Rules, the restructure proposal is to take effect (the restructure date); and
(b) identifying which funds of the insurer are to be restructured under the restructure proposal (the restructuring funds); and
(c) identifying the transferring fund (the transferring fund), being the fund whose policies are to become referable to another fund or other funds of the insurer (the receiving fund(s)) on the restructure date; and
(d) identifying which policy group or groups of the transferring fund are to become referable to the receiving fund(s) on the restructure date; and
(e) stating the risk equalisation jurisdiction or jurisdictions for each receiving fund and other funds of the insurer; and
(f) stating for each receiving fund whether the fund is existing or proposed; and
(g) if the restructure involves more than one receiving fund, specifying which policy group or groups are to become referable to which of the receiving funds on the restructure date; and
(h) if the restructure would result in the insurer having more than one health benefits fund in respect of a particular risk equalisation jurisdiction, explaining how that result would be consistent with section 134-1 of the Act; and
(i) specifying which of the liabilities incurred for the purposes of the transferring fund, including policy liabilities, are to become treated as incurred for the purposes of a receiving fund on the restructure date; and
Note: The specification which is sufficient for this rule is stated in subrule (3).
(j) specifying which of the assets of the transferring fund are to become assets of a receiving fund on the restructure date; and
Note: The specification which is sufficient for this rule is stated in subrule (3).
(k) explaining why the assets and liabilities which are to be transferred under the restructure represent a reasonable estimate within the meaning of paragraph 146-1 (2) (a) of the Act of what would, immediately before the restructure, be the net asset position of the transferring fund; and
(l) if there is more than one receiving fund, explaining why the distribution of assets and liabilities between the restructuring funds is fairly distributed within the meaning of paragraph 146-1 (2) (aa) of the Act; and
(m) if it is proposed that some assets of the transferring fund will not become assets of a receiving fund, identifying the assets and stating why those assets are not to become assets of a receiving fund; and
(n) if it is proposed that some liabilities incurred for the purposes of the transferring fund are not to become treated as incurred for the purposes of a receiving fund, identifying the liabilities and stating why those liabilities are not to become treated as incurred for the purposes of a receiving fund; and
(o) explaining how the restructure will be consistent with
(i) the solvency standard; and
(ii) the capital adequacy standard.
(3) The specifications required by subrule (2) may be:
(a) by listing particular assets or liabilities; or
(b) by reference to categories of assets or liabilities; or
(c) by a combination of (a) and (b).
(1) An insurer must submit to the Council with an application for approval of a restructure proposal:
(a) a business plan (the Business Plan) for each receiving fund covering the period of the first 36 months of operation from the restructure date including the following:
(i) a statement of the liabilities to become treated as incurred for the purposes of the fund and the assets of the fund at the restructure date; and
(ii) a budget statement for the fund for each month of the period of the Business Plan, setting out in detail:
(A) the projected income and expenditure for the fund; and;
(B) the projected assets and liabilities at the end of each month; and
(C) the projected solvency and capital adequacy position of the fund at the end of each month; and
(iii) the ratio that the projected amount of the management and administrative expenses in respect of the conduct of the fund bears to the estimated amount of premiums paid to that fund; and
(iv) a summary of proposed changes, if any, to the insurer's marketing plan, including strategies and costs associated with the restructuring and promotion of the fund; and
(v) the estimated number of policy holders of the fund at the end of each month; and
(vi) a summary of any proposed changes to the insurer's contractual procedures and arrangements with health service providers and other service providers; and
(vii) a summary of any proposed changes to benefits or premiums; and
(viii) particulars of any arrangements or processes necessary for the restructure to take place, including:
(A) any proposed amendments to the insurer's constitution or rules required for the restructure to take place; and
(B) any steps required under any other law of the Commonwealth, or State or Territory required for the restructure to take place; and
(b) a statement by an officer (the certification of compliance) confirming that:
(i) the insurer is not being wound up; and
(ii) the board, or other governing body, of the insurer has considered the restructure proposal and is of the view it meets, and the operation of the restructuring funds from the restructure date in accordance with the restructure will meet, the requirements of:
(A) the Act; and
(B) any Regulations; and
(C) the Rules; and
(c) a report from the insurer's appointed actuary (the actuary's report) which provides the opinion of the actuary:
(i) that the aspects of the Business Plan which provide the information required in paragraph (1) (a) are well-founded; and
(ii) that the assets and liabilities that would be transferred to the receiving fund or funds represent a reasonable estimate of what would be, immediately before the restructure, the net asset position of the transferring funds; and
(iii) about how the restructure will affect the ability of the insurer to comply with:
(A) the solvency standard; and
(B) any solvency direction to which the insurer is subject; and
(C) the capital adequacy standard; and
(D) any capital adequacy direction to which the insurer is subject,
in relation to each of the restructuring funds of the insurer at each of the following times:
(E) the restructure date; and
(F) any time over the first 36 months after the restructure date; and
(G) any time within the foreseeable future of operation of the funds beyond 36 months after the restructure date; and
(iv) about what effects the restructure is likely to have on the premiums for and benefits under:
(A) each policy group of policies which are referable to the transferring fund immediately before the restructure; and
(B) each policy group of policies which are not referable to a receiving fund immediately before the restructure; and
at each of the following times:
(C) the restructure date; and
(D) any time over the first 36 months after the restructure date; and
(E) any time within the foreseeable future of operation of the funds beyond 36 months after the restructure date; and
(d) a copy of the statement, if any, issued by the insurer in accordance with subsection 93-20 (2) of the Act about any proposed change of the rules of the insurer associated with the proposed restructure; and
(e) a copy of any statement issued in accordance with subsection 93-20 (4) about the aspect of the proposed restructure which involves the proposed change in funds to which policies are referable; and
(f) a summary of any submissions in writing (including email or other electronic form) to the insurer from a policy holder of a fund conducted by the insurer in relation to any aspect of the restructure proposal regardless of whether the submission was made in response to a statement issued under subsection 93-20 (2) or subsection 93-20 (4) of the Act or otherwise.
(2) Prior to the restructure date, the insurer must, except to the extent provided for in the Act, procure any amendment of its constitution and any of its rules required for the restructure proposal to take place.
Note: The Act contains relevant provisions in section 146-10 and section 146-15.
(3) Prior to the restructure date, the insurer must take all steps required under any other law of the Commonwealth, a State or a Territory required for the restructure to take place.
Note: The Act contains relevant provisions in section 146-15.
(1) For the purposes of paragraph 146-1 (2) (aa) of the Act, a proposed distribution of assets and liabilities between receiving funds under a proposed restructure is not fairly distributed if the proposed distribution will cause, or may contribute to causing, the insurer to be in breach of:
(a) the Act; or
(b) any Regulations; or
(c) any of the Rules; or
(d) a solvency direction to which the insurer is subject; or
(e) a capital adequacy direction to which the insurer is subject,
at one or more of the following times:
(f) the restructure date; or
(g) any time within the first 36 months after the restructure date; or
(h) any time within the foreseeable future of operation of the restructuring funds beyond 36 months after the restructure date.
(2) Subrule (1) is not an exhaustive statement of criteria for refusing an application under section 146-1 of the Act and does not prevent the Council from taking into account considerations other than those referred to in subrule (1) to form a view that a proposed distribution between receiving funds of assets and liabilities is not fairly distributed for the purposes of paragraph 146-1 (2) (aa) of the Act.
(3) When considering whether a restructure will result in unfairness for the purposes of paragraphs 146-1 (3) (a) or (b) of the Act, the matters the Council may take into account include, but are not limited to, the matters referred to in subrule (1).
(4) In considering an application under subsection 146-1 (1) of the Act, the Council must take into account statements made in:
(a) the application; and
(b) the restructure proposal; and
(c) the certification of compliance; and
(d) the actuary's report,
but is not bound by those statements and may make its own inquiries which may include, without limitation, obtaining other actuarial advice.
If on the restructure date:
(a) the Council has approved a restructure proposal; and
(b) the insurer complies with the requirements of the Rules in relation to the restructure including, without limitation, the requirements under subrule 7 (2) and 7 (3); and
(c) the insurer takes the steps required for establishment of any new fund(s) required for the restructure to come into effect;
then:
(d) the restructure takes place; and
(e) the relevant policies of the transferring fund become referable to the receiving fund or funds in accordance with the restructure proposal; and
(f) the liabilities incurred for the purposes of the transferring fund, including without limitation the policy liabilities, become treated as liabilities incurred for the purposes of the receiving fund or funds in accordance with the restructure proposal; and
(g) the assets of the transferring fund become assets of the receiving fund or funds in accordance with the restructure proposal.
(1) If the Council or the Administrative Appeals Tribunal approves an application for approval of a restructure, then within 20 days of the restructure taking place, the insurer must provide to at least one adult insured under each policy, or, for a policy covering no adults, the person who pays the premium, which is being made, or has been made, referable to a receiving fund, a statement of the outcome of the application.
(2) The notification of outcome referred to in subrule (1) may be combined with the statement provided for the purposes of subsection 93-20 (4) of the Act.
(3) If the application for approval of a restructure is refused by the Council, then no later than 10 days after the time for the lodging of an application for review of the Council's decision by the Administrative Appeals Tribunal, the insurer must provide to at least one adult insured under each policy, or, for a policy covering no adults, the person who pays the premium, which was proposed for transfer, a statement of:
(a) the outcome of the application; and
(b) whether the insurer has lodged or intends to lodge an application for review with the Administrative Appeals Tribunal.
(4) If the application for approval of a restructure is refused on application to the Administrative Appeals Tribunal, then no later than 10 days after the Tribunal's decision being delivered, the insurer must provide to at least one adult insured under each policy, or, for a policy covering no adults, the person who pays the premium, which was proposed for transfer, a statement of the outcome of the application.
Part 4 Merger and acquisition of health benefits funds
(1) If an insurer (the transferee insurer) and one or more insurers (the transferor insurers) enter into an arrangement (the arrangement) under which some or all of the policies that are referable to a health benefits fund or funds (transferring funds), are to become referable to a health benefits fund or funds (receiving funds) of the transferee insurer, in accordance with section 146-5 of the Act, the following rules apply.
(2) The transferor insurer(s) and the transferee insurer must make a written and dated record of the arrangement which is signed on behalf of each party to the arrangement.
(3) The arrangement must do the following:
(a) identify the transferring fund or funds; and
(b) identify the receiving fund or funds; and
(c) identify the date, or means of determining the date, on which the arrangement is to take effect, which must not be before the Council approves the arrangement in writing (the transfer date); and
(d) state, for each transferring fund:
(i) whether all of the policies are to become referable to a receiving fund; and
(ii) if not all of the policies are to become referable to a receiving fund, specify the policy group or groups for the policies which are to become referable to a receiving fund on the transfer date; and
(e) if there is more than one receiving fund, specify for each receiving fund which policy group's or groups' policies are to become referable to the receiving fund on the transfer date;
(f) for each receiving fund, specify the assets of, and liabilities incurred for the purposes of, a transferring fund which are to become assets of, and become treated as liabilities incurred for the purposes of, the receiving fund on the transfer date; and
(g) provide for carrying out the requirements under the general law for the transfer of the assets and liabilities which are to be transferred under the arrangement, including obtaining relevant third-party consents, novations of agreement and execution and lodgement of documents for execution; and
(h) without limiting the generality of paragraph (g), in relation to each asset the transfer of which to a transferee insurer at law requires registration and the transfer of which will not be complete in law on the transfer date, impose on the transferor insurer obligations to:
(i) provide all such assistance in obtaining registration as the transferee may reasonably require whether before or after the transfer date, including, without limitation, provide assistance in responding to requisitions from a registrar of titles; and
(ii) from the transfer date until registration of the transferee's title, hold the asset on trust for the transferee on the terms set out in Schedule 1; and
(i) in relation to an asset which cannot be transferred under the general law, impose on the transferor insurer obligations to hold the asset on trust for the transferee insurer on the terms set out in Schedule 1; and
(j) without limiting the generality of paragraph (g) in relation to each liability, the transfer of which will not be completed on the transfer date, impose on each transferee insurer obligations to:
(i) take all such steps as the transferor insurer may reasonably require, whether before or after the transfer date, to achieve transfer of the liability if such transfer is possible under the general law; and
(ii) indemnify the transferor insurer against any claims made on or after the transfer date which are allegedly based on the liability with the obligation to indemnify being conditional on the transferor insurer responding to the claim in such manner as the transferee insurer may reasonably require, including, without limitation, allowing the transferee insurer at its own expense to settle the claim, take over any litigation to defend the claim, or both; and
(k) without limiting the generality of paragraph (g), provide for access for each transferee insurer to such of the business records of the transferring fund as the transferee insurer may require to act as insurer for the transferred policies.
(4) The specifications required by subrule (3) may be:
(a) by listing particular assets or liabilities; or
(b) by reference to categories of assets or liabilities; or
(c) by a combination of (a) and (b).
(1) The parties to an arrangement must submit to the Council with an application for approval of the arrangement:
(a) a copy of the arrangement;
(b) a business plan (the Business Plan) for each receiving fund covering the period of the first 36 months of operation from the transfer date including the following:
(i) a statement of the liabilities incurred for the purposes of, and assets of, the fund at the transfer date; and
(ii) a budget statement for the fund for each month of the period of the Business Plan, setting out in detail:
(A) the projected income and expenditure for the fund; and;
(B) the projected assets and liabilities at the end of each month; and
(C) the projected solvency and capital adequacy position of the fund at the end of each month; and
(iii) the ratio that the projected amount of the management and administrative expenses in respect of the conduct of the fund bears to the estimated amount of premiums paid to that fund; and
(iv) summary of proposed changes, if any, to the insurer's marketing plan including strategies and costs associated with the implementation of the arrangement and promotion of the fund; and
(v) the estimated number of policy holders of the fund at the end of each month; and
(vi) summary of any proposed changes to the insurer's contractual procedures and arrangements with health service providers and other service providers; and
(vii) summary of any proposed changes to benefits and premiums; and
(c) for each receiving fund, a statement by an officer for the transferee insurer (the certification of compliance) confirming that the board, or other governing body, of the insurer has considered the arrangement and is of the view that the arrangement meets, and the operation of the receiving fund from the transfer date in accordance with the arrangement will meet, the requirements of:
(i) the Act; and
(ii) any Regulations; and
(iii) the Rules; and
(d) for each receiving fund, a report from the transferee insurer's appointed actuary (the actuary's report) which provides the opinion of the actuary:
(i) that the aspects of the Business Plan which provide the information required in paragraph (b) are well-founded; and
(ii) that the assets and liabilities that would be transferred to the receiving fund or funds represent a reasonable estimate of what would be, immediately before the arrangement takes effect:
(A) if there is one transferring fund?the net asset position of the transferring funds; and
(B) if there is more than one transferring fund?the sum of the net asset positions of each of the funds;
(iii) about how the arrangement will affect the ability of the insurer to comply with:
(A) the solvency standard; and
(B) the capital adequacy standard,
in relation to each of the relevant funds of the insurer at each of the following times:
(C) the transfer date; and
(D) any time over the first 36 months after the transfer date; and
(E) any time within the foreseeable future of operation of the funds beyond 36 months after the transfer date; and
(iv) about what effects the arrangement is likely to have on the premiums for, and benefits under:
(A) each policy group of the policies which are referable to the transferring fund immediately before the restructure; and
(B) each policy group of the policies which are referable to a receiving fund immediately before the restructure,
at each of the following times:
(C) the transfer date; and
(D) any time over the first 36 months after the transfer date; and
(E) any time within the foreseeable future of operation of the funds beyond 36 months after the transfer date; and
(e) for each transferring fund, a statement by an officer for the transferor insurer (the certification of compliance) confirming that the board, or other governing body, of the insurer has considered the arrangement and is of the view that the arrangement meets, and the operation of the receiving fund from the transfer date in accordance with the arrangement will meet, the requirements of:
(i) the Act; and
(ii) any Regulations; and
(iii) the Rules; and
(f) a report from the transferor insurer's appointed actuary (the actuary's report) which provides the opinion of the actuary:
(i) that the assets and liabilities that would be transferred to the receiving fund or funds represent a reasonable estimate of what would be, immediately before the arrangement takes effect:
(A) if there is one transferring fund?the net asset position of the transferring fund; and
(B) if there is more than one transferring fund?the sum of the net asset positions of each of the funds; and
(ii) that for each transferring fund to which subparagraph 146-5 (1) (b) (i) of the Act applies, the net asset position of the fund immediately after the arrangement takes effect will not be greater than zero; and
(iii) about how the arrangement will affect the ability of the insurer to comply with:
(A) the solvency standard; and
(B) the capital adequacy standard,
at each of the following times:
(C) the transfer date; and
(D) any time over the first 36 months after the transfer date; and
(g) a copy of the statement, if any, issued by a party to the arrangement in accordance with subsection 93-20 (2) of the Act about any proposed change of the rules of the insurer associated with the arrangement; and
(h) a copy of any statement issued by a party to the arrangement in accordance with subsection 93-20 (4) about the aspect of the arrangement which involves the proposed change in funds to which policies are referable; and
(i) a summary of any submissions in writing (including email or other electronic form) to an insurer party to the arrangement from a policy holder of a policy of a fund conducted by the insurer in relation to any aspect of the arrangement regardless of whether the submission was made in response to a statement issued under subsection 93-20 (2) or subsection 93-20 (4) of the Act or otherwise.
(2) Prior to the transfer date, each party to the arrangement must, except to the extent provided for in the Act, procure any amendment of its constitution and any of its rules required for the arrangement to take place.
Note: The Act contains relevant provisions in s146-10 and s146-15.
(3) Prior to the transfer date, each party to the arrangement must take all steps required under any other law of the Commonwealth, a State or a Territory required for the arrangement to take place.
Note: The Act contains relevant provisions in s146-15.
(1) For the purposes of paragraph 146-5 (3) (b) of the Act, a proposed distribution of assets and liabilities between receiving funds under a proposed arrangement is not fairly distributed if the proposed distribution will cause, or may contribute to causing, a transferee insurer to be in breach of:
(a) the Act; or
(b) any Regulations; or
(c) any of the Rules; or
(d) a solvency direction to which the insurer is subject; or
(e) a capital adequacy direction to which the insurer is subject,
at one or more of the following times:
(f) the transfer date; or
(g) any time within the first 36 months after the transfer date; or
(h) any time within the foreseeable future of operation of the restructuring funds beyond 36 months after the transfer date.
(2) Subrule (1) is not an exhaustive statement of criteria for refusing an application under section 146-5 of the Act and does not prevent the Council from taking into account considerations other than those referred to in subrule (1) to form a view that a proposed distribution between receiving funds of assets and liabilities is fairly distributed for the purposes of paragraph 146-5 (3) (b) of the Act.
(3) When considering whether a distribution between receiving funds pursuant to a restructure is fairly distributed for the purposes of paragraph 146-5 (3) (b) of the Act, the relevant matters the Council may take into account include, but are not limited to, the matters referred to in subrule (1).
(4) In considering an application under subsection 146-5 (1) of the Act, the Council must take into account statements made in:
(a) the application; and
(b) the arrangement; and
(c) the certifications of compliance; and
(d) the actuaries' reports,
but is not bound by those statements and may make its own inquiries which may include, without limitation, obtaining other actuarial advice.
If, on the transfer date:
(a) the Council has approved an arrangement; and
(b) the transferor and transferee insurer(s) have:
(i) complied with rules 11 and 12 including, without limitation, subrules 12 (2) and 12 (3); and
(ii) taken the actions referred to in Schedule 1,
then:
(c) each transferee insurer is substituted for the transferor insurer as the insurer for each policy identified in the arrangement as a policy which is to become referable to a receiving fund of the transferee insurer; and
(d) the policy operates on and from the transfer date as if all references in the policy to the transferor insurer were references to the transferee insurer; and
(e) policies referable to the transferring fund(s) become referable to the receiving fund(s) in accordance with the arrangement; and
(f) the liabilities incurred for the purposes of the transferring fund(s), including without limitation the policy liabilities, become treated as incurred for the purposes of the receiving fund(s) in accordance with the arrangement; and
(g) the assets of the transferring fund(s) become assets of the receiving fund(s) in accordance with the arrangements.
Note: Subsection 146-5 (7) of the Act provides that, for the purposes of the Act, an insurance policy that becomes referable to a health benefits fund of the transferee insurer as a result of the arrangement is treated, after the arrangement takes effect, as if it were an insurance policy issued by the transferee insurer.
.
(1) If the Council or the Administrative Appeals Tribunal approves an application for approval of an arrangement for a merger or acquisition, then within 20 days of the arrangement taking effect, the insurers must provide to at least one adult insured under each policy, or, for a policy covering no adults, the person who pays the premium, which is being made, or has been made, referable to a receiving fund, a statement of the outcome of the application.
(2) The notification of outcome referred to in subrule (1) may be combined with the statement provided for the purposes of subsection 93-20 (4) of the Act.
(3) If the application for approval of an arrangement is refused by the Council, then no later than 10 days after the time for the lodging of an application for review of the Council's decision by the Administrative Appeals Tribunal, the insurers must provide to at least one adult insured under each policy, or, or, for a policy covering no adults, the person who pays the premium, which was proposed for transfer, a statement of:
(a) the outcome of the application; and
(b) whether either of the insurers has lodged or intends to lodge an application for review with the Administrative Appeals Tribunal.
(4) If the application for approval of an arrangement is refused on application to the Administrative Appeals Tribunal, then no later than 10 days after the Tribunal's decision being delivered, the appellant must provide to at least one adult insured under each policy, or, or, for a policy covering no adults, the person who pays the premium, which was proposed for transfer, a statement of the outcome of the application.
Part 5 Risk equalisation jurisdictions
For subsection 146-1 (6) of the Act, the areas specified in the following paragraphs are each a risk equalisation jurisdiction:
(a) Australian Capital Territory and New South Wales;
(b) Northern Territory;
(c) Queensland;
(d) South Australia;
(e) Tasmania;
(f) Victoria;
(g) Western Australia and the Territory of Christmas Island and the Territory of Cocos (Keeling) Islands.
(1) Within 20 days of first being notified that a policy holder of a policy has an address which is not in the same risk equalisation jurisdiction as is the address of one or more other policy holders of the same policy, the insurer may by a written and dated determination allocate the policy to a risk equalisation jurisdiction in which one or more of the policy holders has their address.
(2) If the insurer makes a determination in accordance with subrule (1), then the policy is allocated to the risk equalisation jurisdiction in accordance with the determination and is taken to have been so allocated from the date that the insurer was notified of the difference in addresses.
(3) If the insurer relies on an allocation under subrule (1), the insurer must on written request from the Council to do so, provide access to the record of determination referred to in subrule (1).
(4) If the insurer fails:
(a) to allocate the policy to a risk equalisation jurisdiction, in accordance with subrule (1); or
(b) to provide the access referred to in subrule (3) in response to a written request from the Council,
then the policy is allocated to the risk equalisation jurisdiction which corresponds to the address of the first person named in the policy records of the insurer and is taken to have been so allocated from the date that the insurer was notified of the difference in addresses.
Part 6 Solvency and capital adequacy standards
For subsection 140-5 (1) of the Act, a solvency standard, as set out in Schedule 2 of these Rules, is established for the purposes of Division 140 of the Act.
For subsection 143-5 (1) of the Act, a capital adequacy standard, as set out in Schedule 3 of these Rules, is established for the purposes of Division 143 of the Act.
Schedule 1 Mergers and acquisitions
The trust referred to in subrule 11 (2) is to include the following terms:
(a) [the transferor insurer] must, at [the transferee insurer’s] expense (including [the transferor insurer’s] internal costs and any legal fees), enforce or exercise any rights relating to those assets against any third party in the manner that [the transferee insurer] reasonably directs.
(b) [the transferor insurer] must, if [the transferee insurer] cannot lawfully perform an obligation or exercise a right of [the transferor insurer] in relation to those assets, at the request and expense of [the transferee insurer], perform that obligation or exercise that right.
(c) [the transferor insurer] must pay all benefits arising from those assets (or the affected part of the business) to [the transferee insurer].
(d) [the transferee insurer] must duly perform any obligations in relation to those assets on behalf of [the transferor insurer] at its own expense.
For each transferring fund, the transferor insurer must give to the relevant transferee insurer for the assets and liabilities of the transferring fund which are being transferred to the transferee insurer:
(a) possession of assets which are physical assets; and
(b) certificates of title, registration certificates and other documents or instruments which evidence ownership of assets of the fund; and
(c) duly executed assignments or novations of relevant contracts and evidence of the written consent of relevant third parties to the assignments or novations of the contracts; and
(d) duly executed assignments or novations of leases and evidence of the written consent of the landlord to the assignments or novations of the leases; and
(e) occupation of any leasehold properties which are assets of the transferee fund; and
(f) duly executed assignments or change of ownership forms to transfer intellectual property assets of the fund to the Transferee; and
(g) an irrevocable notice of cancellation of all signatories for each bank account containing fund assets (fund bank account) addressed to the relevant bank and a notice of consent to the appointment of the transferee's nominees as signatories on the account; and
(h) an irrevocable written direction addressed to each relevant bank on and from the transfer date to act in relation to a fund bank account with the bank only on the directions of the transferee; and
(i) all notices, executed transfers in registrable form, certificates and other instruments or documents required under any applicable law in connection with the transfer of the assets of the fund required to transfer title to the transferee; and
(j) all other notices, executed transfers in registrable form, certificates and other instruments or documents required under any applicable law to enable the transferee to conduct the business of the fund and to use any business names and websites of the fund.
Schedule 2 Solvency standard
(1) The purpose of the solvency standard, established for the purposes of Division 140 of the Act, is to ensure as far as practicable that at any time the financial position of a fund conducted by an insurer is such that the insurer will be able to meet, out of the fund’s assets, all liabilities incurred for the purposes of the fund as those liabilities become due.
(2) The Solvency Reserve to be calculated under this standard for each fund conducted by an insurer is based on a run-off view of the fund and therefore requires the insurer to demonstrate that the fund will be able to reliably meet the accrued liabilities and obligations of the fund in the event of the termination of the insurer's fund.
Note: An insurer may apply under Division 149 of the Act for the termination of each of its health benefits funds. In addition, if an external manager has been appointed, under Division 217 of the Act, to a health benefits fund of an insurer the Federal Court, under section 220-1 of the Act, may order the appointment of a terminating manager of each of the insurer's funds, and the termination is conducted in accordance with Part 6-5 of the Act.
This standard applies to each fund conducted by an insurer.
(1) In this standard:
accounting standards means standards made by the Australian Accounting Standards Board.
actuary means the insurer's appointed actuary.
associate in relation to an investor means an entity, including an unincorporated entity, over which the investor has significant influence and that is neither a subsidiary of the investor nor an interest in a joint venture.
authorised deposit-taking institution means a body corporate in relation to which an authority under subsection 9 (3) of the Banking Act 1959 is in force.
average deficit per single equivalent unit (SEU) for each quarter means the amount determined by the Council for each risk equalisation jurisdiction as the gross deficit for the risk equalisation jurisdiction for that quarter divided by the average number of all SEUs for the risk equalisation jurisdiction for that quarter.
best estimate means a best estimate assumption, basis, projection or other best estimate of future experience which is:
(a) made having regard to reasonably available statistics and other relevant information; and
(b) not deliberately or carelessly overstated or understated.
calculated deficit for a fund means the sum of the estimated amounts for each risk equalisation jurisdiction applicable to the insurer determined consistently with paragraph 11 (1) (e) of the Private Health Insurance (Risk Equalisation Policy) Rules 2007 at the valuation date.
capital in relation to a fund means the assets of the fund less the reported liabilities of the fund.
central estimate means, if all the possible values of the liability being estimated are expressed as a statistical distribution, the mean of that distribution.
expense amount means the amount determined in accordance with Part 5 of this standard.
fund means a health benefits fund.
gross deficit means the sum of the estimated amounts for each risk equalisation jurisdiction applicable to the insurer determined consistently with paragraph 11 (1) (b) of the Private Health Insurance (Risk Equalisation Policy) Rules 2007 at the valuation date.
health-related insurance business means health-related business referred to in paragraph 131-15 (1) (b) of the Act where that business is included as business of the fund.
Note: Health-related business referred to in paragraph 131-15 (1) (b) of the Act is the business of undertaking liability, by way of insurance, to indemnify people who are ineligible for Medicare for costs associated with providing treatment, goods or services that are provided to those people in Australia and are provided to manage or prevent diseases, injuries or conditions;
inadmissible assets amount means the amount determined in accordance with Part 7 of this standard.
investment entity means an entity whose assets are solely investments, where the sole purpose of the entity is investment activities and where the investor investing in that entity has security directly linked to those assets.
reported liabilities means the value of the liabilities of the fund determined at the valuation date in accordance with applicable accounting standards less the amount of subordinated debt that may be counted under clause 27 of this standard.
repealed solvency or capital adequacy standards means the solvency standard or capital adequacy standard, as the case may be, established under the National Health Act 1953 and in force immediately before the commencement of these Rules.
resilience amount means the amount determined in accordance with Part 8 of this standard.
risk equalisation refers to the statutory pooling arrangements for the Risk Equalisation Trust Fund.
solvency insurance liabilities amount means the amount determined in accordance with Part 6 of this standard.
solvency obligation means the obligation specified in subclause 5 (1) of this standard.
solvency requirement for a fund means the Solvency Reserve plus the reported liabilities.
Solvency Reserve means the amount determined in accordance with subclause 6 (2) of this standard.
subordinated debt for a fund means the amount of debt that meets the requirements of Part 9 of this standard.
subsidiary means an entity, including an unincorporated entity, that is legally or practically controlled by another entity (known as the parent).
this standard means the solvency standard established by these Rules.
valuation date is the day on which a calculation is carried out for the purposes of this standard.
(2) For the purposes of making calculations required by this standard, the value of assets and liabilities of the fund and the insurer are to be determined in accordance with relevant accounting standards.
(3) In this standard, the management capital amount for each fund is $1 million.
(4) In this standard, the number of SEUs in respect of a fund is to be calculated by reference to the number of SEUs applying to each category of policy as specified in the Private Health Insurance (Risk Equalisation Policy) Rules 2007 made under the Act.
(1) In this standard, a party is related to an entity if:
(a) directly, or indirectly through one or more intermediaries, the party:
(i) controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries); or
(ii) has an interest in the entity that gives it significant influence over the entity; or
(iii) has joint control over the entity; or
(b) the party is an associate of the entity; or
(c) the party is a joint venture in which the entity is a venturer; or
(d) the party is a member of the key management personnel of the entity or its parent; or
(e) the party is a close member of the family of an individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity.
(2) Close member of the family of an individual means a family member who may be expected to influence, or be influenced by, that individual in their dealings with the entity. They may include:
(a) the individual’s domestic partner and children; and
(b) children of the individual’s domestic partner; and
(c) dependants of the individual or the individual’s domestic partner.
Part 2 Solvency Reserve
(1) An insurer must ensure that at all times the value of the capital of each fund conducted by the insurer equals or exceeds the Solvency Reserve determined for that fund at the valuation date.
(2) The insurer must disclose in its financial statements the Solvency Reserve for each of its funds for the period to which the financial statements relate.
Note: The Council will use the Solvency Reserve as an indicator of the financial position of the insurer.
(1) The insurer must determine, in accordance with this standard, the Solvency Reserve for each fund conducted by the insurer.
(2) The Solvency Reserve for a fund is determined as the sum of the following amounts:
(a) management capital amount; plus
(b) expense amount; plus
(c) solvency insurance liabilities amount; plus
(d) inadmissible assets amount; plus
(e) resilience amount.
If the calculation of any of the amounts set out in subclause 6 (2), or the calculation of any of the components of those amounts under this standard, results in a value less than zero, the amount is to be taken to be zero for the purposes of this standard.
Part 3 Principles
(1) In assessing asset risks under this standard, the insurer is to:
(a) take account of the effective exposure of the fund to various asset classes, regardless of the physical asset holdings of the fund; and
(b) consider exposure to counterparty risks, being the risk that another party to a transaction may default on the agreement, relating, but not limited to, futures and options contracts, swaps, hedges, warrants, forward rate and repurchase agreements.
(2) In the case of investments with an investment entity, the insurer is to consider the exposure of the fund's investments to the underlying assets of the entity.
(1) In applying this standard the insurer must determine whether the amounts calculated under this standard in respect of asset risks should be increased to provide additional assurance that the fund is able to meet its liabilities as and when they fall due.
(2) In deciding whether to increase any amount calculated under this standard the insurer must consider the overall portfolio of assets of the fund, in particular the:
(a) overall diversification of the portfolio, and
(b) liquidity of the portfolio, and
(c) overall exposure to credit risks, including the fund's exposure to any obligor of low credit standing.
(1) The determination of insurance liabilities of the fund under this standard may include allowance for the discounting of future claim payments in accordance with the relevant accounting standards.
(2) For the purposes of this standard, the determination of any discounted insurance liability must adopt a discount rate consistent with, and no greater than, the risk-free rate determined from the market yield available on Commonwealth Government Treasury Bonds for the relevant duration.
(1) Where an insurer is subject to taxation, allowance must be made for taxation in the determination of the solvency insurance liabilities amount.
(2) To the extent that any increase in the fund’s liability provisions would generate a corresponding tax benefit, an insurer is to allow for the tax benefit in respect of the cost of the margins held via an adjustment to the relevant reserve.
Part 4 Materiality
(1) In calculating the amounts that comprise the Solvency Reserve for a fund under subclause 6 (2), an insurer:
(a) must strictly comply with the valuation methods set out in this standard for any such amount that is material; and
(b) may adopt an alternative valuation method to calculate any such amount that is immaterial under this Part.
(2) The materiality of an amount is determined by dividing a reasonable estimate of the amount by a reasonable estimate of the solvency requirement, expressing the result as a percentage, and then applying to that result the thresholds set out in subclause (3).
(3) For the purposes of these standards, where the result from subclause (2) in respect of an amount is:
(a) 10% or more-the amount is material; and
(b) 5% or less-the amount is immaterial.
(4) Where an insurer adopts an alternative valuation method in accordance with this Part, the insurer must consider at each subsequent reporting date whether detailed valuations need to be performed to demonstrate the continued appropriateness of any alternative valuation methods.
(1) The expense amount (EA) for a fund is to be determined as:
|
EA |
= |
0.4 x total non-claim expenses |
(2) The total non-claim expenses is the total of the expenses of the fund that are not benefit payments for the 12 months prior to the valuation date.
(3) If the insurer has not been in operation for 12 months prior to the valuation date, subclause (2) does not apply and the insurer's total non-claim expenses for the purposes of the formula in subclause (1) is 40% of the expected expenses of the fund that are not benefit payments for the 12 months subsequent to the valuation date.
Part 6 Solvency insurance liabilities amount
(1) The solvency insurance liabilities amount for a fund is the sum of the following components:
(a) solvency health insurance liabilities component; and
(b) solvency health-related insurance liabilities component.
(1) The solvency health insurance liabilities component for a fund is the sum of the following components calculated in accordance with this standard:
(a) health insurance outstanding claims component; and
(b) risk equalisation outstanding claims component; and
(c) risk equalisation accrued liability component; and
(d) health insurance unexpired risk component.
(2) The health insurance outstanding claims component for a fund is determined as:
(a) 1.1 times the outstanding claims liability in relation to the health insurance business of the fund calculated in accordance with clause 17 of this standard; less
(b) the liability in respect of outstanding claims in relation to the health insurance business of the fund reflected in the reported liabilities of the fund.
(3) The risk equalisation outstanding claims component for a fund is the absolute value of 10 per cent of the risk equalisation outstanding claims liability calculated in accordance with clause 18 of this standard.
(4) The risk equalisation accrued liability component is 10 per cent of the calculated deficit of the fund.
(5) The health insurance unexpired risk component for a fund is determined as:
(a) 1.1 times the unexpired risk liability in relation to the health insurance business of the fund calculated in accordance with clause 19 of this standard; less
(b) unearned premium liability in relation to the health insurance business of the fund reflected in the reported liabilities of the fund and calculated in accordance with clause 19 of this standard.
(1) The solvency health-related insurance liabilities component for a fund is determined as the sum of the following components:
(a) health-related insurance outstanding claims component (determined separately for each separate health-related insurance business); and
(b) health-related insurance unexpired risk component (determined separately for each separate health-related insurance business).
(2) The health-related insurance outstanding claims component for a fund is determined as:
(a) 1.1 times the outstanding claims liability in relation to the health-related insurance business of the fund calculated in accordance with clause 17 of this standard; less
(b) the liability in respect of outstanding claims in relation to the health-related insurance business of the fund reflected in the reported liabilities of the fund.
(3) The health-related insurance unexpired risk component for a fund is determined as:
(a) 1.1 times the unexpired risk liability in relation to the health-related insurance business of the fund calculated in accordance with clause 19 of this standard; less
(b) the unearned premium liability in relation to the health-related insurance business of the fund reflected in the reported liabilities of the fund and calculated in accordance with clause 19 of this standard.
(1) The outstanding claims liability is the central estimate of the value of the outstanding claims as at the valuation date.
(2) This component includes an allowance for claims-handling expenses.
(3) Outstanding claims are claims that have been reported and have not yet been settled, claims that have been incurred but not yet reported (IBNR), claims that have been incurred but not yet fully settled (IBNER) and claims which have been administratively finalised but which may be reopened.
(4) The outstanding claims liability is to be determined gross of recoveries from the Risk Equalisation Trust Fund.
(5) The valuation method adopted to determine the outstanding claims liability must take appropriate account of:
(a) the historical pattern, over a minimum period of the 12 months immediately prior to the valuation date, of the rate of reporting of claims, the rate of settlement of claims, the development of benefit payments and the impact of refunds of benefit payments; and
(b) trends in utilisation rates and unit costs, especially regarding seasonality and other factors which may influence claims lodgement or processing trends; and
(c) any special features or changes to the ordinary experience, such as changes in benefit design, claims-handling procedures and the mix of products and insured persons.
(1) The risk equalisation outstanding claims liability for a fund is the amount in respect of the outstanding claims mentioned in clause 17 of this standard, determined as:
(a) calculated deficit; less
(b) gross deficit.
(2) The amounts determined in subclause (1) must be determined from a best estimate of the business of the insurer's fund and a best estimate of the risk equalisation trust fund levies for the relevant period.
(3) The amounts are to be determined taking into account the experience of previous quarters, historical seasonal trends, reasonable assumptions in respect of the claims experience of the industry at the risk equalisation jurisdiction level for the fund and reasonable assumptions in respect of the total insured population of the industry at the risk equalisation jurisdiction level.
(1) The unearned premium liability is the liability determined in respect of premiums paid in advance, being premiums paid for policies prior to the date of valuation which provide cover in respect of some period beyond the valuation date.
(2) The unexpired risk liability is determined as the premiums paid in advance times the loss ratio.
(3) The loss ratio is ordinarily to be determined as the sum of the claims ratio and the expense ratio. Where the insurer believes that this may no longer be a best estimate measure of the prospective annualised loss ratio for the insurance business on the current premium rates, a suitable alternative ratio is to be adopted.
(4) The claims ratio is the ratio of the expected claims and, where applicable, risk equalisation levy and payments from the Risk Equalisation Trust Fund to earned premiums underlying the effective premium rate of the business.
(5) The expense ratio is the ratio of the expenses to earned premiums underlying the effective premium rate of the business.
(6) The unexpired risk may be determined at an aggregate level for the health insurance business of the fund and must be determined separately for each health-related business.
Part 7 Inadmissible assets amount
(1) The inadmissible assets amount for a fund is the sum of the following three components:
(a) an amount in respect of assets used for the conduct of business calculated in accordance with clause 21 of this standard; plus
(b) an amount in respect of holdings in associate and subsidiary entities calculated in accordance with clause 22 of this standard; plus
(c) an amount in respect of asset concentration risks calculated in accordance with clause 23 of this standard.
(2) Where the inadmissible assets amount is reduced by deferred tax provisions or other liabilities relevant to the inadmissible portion of the assets, the reduction must be only to the extent those provisions or liabilities are assessed as likely to be realised.
(1) The assets used for the conduct of business component for a fund is the amount by which the stated value of the assets in the financial statements exceeds the value the assets would have if the fund was in terminating management.
(2) The value to be ascribed to the assets referred to in subclause (1) is subject to the following:
(a) loans to directors, employees, advisers and related parties:
(i) in respect of money loaned or advanced on an unsecured basis, no value is to be ascribed to the debt; and
(ii) in respect of money loaned or advanced on a secured basis, the value to be ascribed to the debt must not exceed the amount of the security available to extinguish the debt; and
(iii) where the loan to a related party is the provision of subordinated debt, the party is a prudentially regulated financial institution, and the subordinated debt qualifies as capital within that institution, the value to be ascribed is to be determined in accordance with clause 22.
(b) premiums in arrears:
(i) where the amount of the premiums has been collected by a third party and is in effect ‘in transit’ from the third party to the fund, the value ascribed to the premiums must not be greater than the value of the premiums; and
(ii) in any other circumstances a nil value must be adopted.
(c) equipment (other than computer software) — the value of equipment owned by the insurer must not exceed the net realisable value of that asset; and
(d) computer software:
(i) if the resale value is known, the value ascribed to computer software must not exceed the known resale value of that asset; and
(ii) if the resale value is not known, a zero value must be ascribed; and
(e) future income tax benefits — the value of any future income tax benefit due to the insurer must not exceed the value of any income tax benefit that would accrue and be realised on ceasing business; and
(f) pre-paid expenses — the value of any pre-payment must not exceed the value of the recoverable amount; and
(g) intangible assets including deferred acquisition costs — nil value.
(1) The insurer must determine the value of holdings in associate and subsidiary entities that are assets of the fund.
(2) Where the associate or subsidiary entity is directly, or indirectly, financially or operationally dependent upon the fund, the value placed on the investment in the entity must not exceed the value of net tangible assets.
(3) Where the associate or subsidiary entity is a self sustaining operation the value placed on the investment in the entity must not exceed its fair value.
(4) Where an associate or subsidiary is a financial institution subject to prudential regulation that requires the maintenance of minimum capital, the insurer must include in the amount to be calculated under this clause an additional amount that reflects the extent that the value on the investment in the entity in the financial statements includes the prudential capital requirement on the entity.
(1) The asset concentration risks component for a fund is determined as the sum of the amounts by which the value of any single asset or credit exposure (with a particular obligor or related party) of the fund exceeds the relevant amount specified in subclause (2) or, if subclause (2) is not applicable, the amount by which the value of the asset or credit exposure exceeds 10% of the value of the assets of the fund.
(2) For the following assets and credit exposures, the relevant amount is:
(a) 100% of the value of the assets of the fund, where the asset or credit exposure concerned is:
(i) guaranteed by a national government, being the national government of the country in whose currency the liabilities of the fund are denominated; or
(ii) guaranteed by an Australian State or Territory government; and
(b) the greater of 50% of the value of the assets of the fund and $5 million, where the asset or credit exposure concerned is:
(i) guaranteed by an Australian local government or public sector entity; or
(ii) secured by bank bills or deposits with an authorised deposit-taking institution which has net assets of at least $50 million; and
(c) the greater of 25% of the value of the assets of the fund and $5 million, where the asset or credit exposure concerned is secured by deposits with an authorised deposit-taking institution which has net assets of less than $50 million and which is not a related party.
(1) The resilience amount for a fund is to be determined in accordance with the following formula?
where:
|
RA |
= |
resilience amount. |
|
L |
= |
The risk adjusted liabilities of the fund determined by application of this standard to reflect the liability risks prior to the prescribed economic changes. That is, L is equal to the reported liabilities of the fund plus the solvency insurance liabilities amount, plus the expense amount, plus the management capital amount. |
|
L’ |
= |
The value of the liabilities after the prescribed economic changes. |
|
f |
= |
A / A’. |
|
A |
= |
Value of the assets of the fund less any inadmissible assets amount determined in accordance with this standard, prior to the prescribed economic changes. |
|
A’ |
= |
Value of those assets of the fund less any inadmissible assets amount determined in accordance with this standard, after the prescribed economic changes. |
(2) The prescribed economic changes are:
|
|
INVESTMENT SECTOR |
PRESCRIBED ECONOMIC CHANGE
FOR SOLVENCY
|
|
1. |
Equities |
Fall in capital value of (25% x DF) |
|
2. |
Property (other than listed property trusts) |
Fall in capital value of (25% x DF) |
|
3. |
Listed property trusts |
Fall in capital value of (15% x DF) |
|
4. |
Interest bearing |
Rise in yield of (1.5% x DF) |
|
5. |
Indexed bonds |
Rise in yield of (0.50% x DF) |
|
|
|
|
|
|
CURRENCY |
PRESCRIBED EXCHANGE RATE MOVEMENT FOR SOLVENCY
|
|
6. |
All |
10% reduction in value of assets exposed to a denomination other than that of the liabilities. |
where yield means:
(a) for interest bearing securities other than irredeemable securities — redemption yield;
(b) for irredeemable interest bearing securities — running yield; and
(c) for indexed bonds — real yield.
(3) DF is determined in accordance with the following formula?
DF = { Ö (E2 + P2 + F2) } / (E + P + F)
where:
|
E = |
the proportionate holding of admissible assets in the equity sector times 30%. |
|
P = |
the proportionate holding of admissible assets in the property sector times 20%. |
|
F = |
the proportionate holding of admissible assets in the cash and fixed interest sector times 1.5% times the average term to maturity, measured in years, for the sector. |
Part 9 Subordinated debt and alternative sources of capital
(1) The purpose of this Part is to specify:
(a) the terms on which debt qualifies as subordinated debt within the meaning of this Part; and
(b) the amount of subordinated debt that may be counted for the purposes of this standard.
(2) The solvency obligation may be satisfied by either:
(a) shareholders' or members' funds represented by the disclosed capital of a fund, in terms of the retained earnings and capital held within the fund, that are subordinate to the other obligations of the fund; or
(b) the use of alternative sources of capital support for the business of a fund such as subordinated debt, where the obligations to the debt party under the instrument are subordinate to the other obligations of the fund.
(3) Only subordinated debt within the meaning of this Part will qualify as an alternative source of capital for the purposes of this standard.
(4) This Part sets out the terms that an instrument or agreement must contain and the requirements that it must satisfy in order to be subordinated debt within the meaning of this Part.
(1) All proposals to issue or borrow subordinated debt, the purpose of which is, at the time of issue or borrowing, or may be in the future, to contribute to the capital requirements of a health benefits fund, must be submitted to the Council for individual approval if the debt is to be taken into account for the purposes of this standard.
(2) An instrument or agreement of issue of subordinated debt will be assessed once only, prior to the time of issue. The quantum of the proposed issue and timing for draw down will be important items in that assessment. However, separate requirements limit that quantum, to the extent it is subordinated debt within the meaning of this Part, on a continuous basis into the future.
(3) A subordinated debt must be created by a debt instrument or agreement which continuously meets the conditions and requirements set out in subclause (4).
(4) The debt instrument or agreement must provide for the following terms and conditions:
(a) it must have a minimum term of 10 years from the commencement of the loan; and
(b) there must be no circumstances where repayment may be accelerated or called at the lender's or any third party's option; and
(c) interest charged under the instrument or agreement may only be fixed or floating by reference to a benchmark interest rate. The basis for the calculation of interest must be set on a defined non-escalating basis for minimum periods of five years under the instrument or agreement; and
(d) interest bases may include default rate escalation, subject to a maximum of 2% escalation, or where interest is charged at a lower rate when it is paid within a defined period, the lower rate must not be more than 2% less than the highest interest rate payable under the instrument or agreement; and
(e) interest payments are not to be payable where the payment of these would cause the fund to breach the solvency obligation; and
(f) interest payment obligations may be capitalised and interest may be charged on capitalised interest; and
(g) capital repayments are not to be made where the repayment of these would cause the fund to breach its solvency or capital adequacy obligations; and
(h) delayed capital repayments may be subject to continuing interest charges, on the interest charge and repayment conditions specified in this subclause.
(1) The maximum amount of subordinated debt that may be counted for the purposes of this standard is the greater of:
(i) 50% of the Solvency Reserve; or
(j) if subclause (2) applies, the amount calculated under that clause.
(2) If an insurer has an Approved Subordinate Debt, in the meaning of that term in the repealed solvency or capital adequacy standards, the maximum amount for that Approved Subordinate Debt that may counted as a subordinated debt for the purposes of this standard is the lesser of the approved amount and 50% of the solvency requirement.
(3) Subclause (2) applies only for an Approved Subordinate Debt that was in existence at the commencement of these Rules and only for so long as the debt complies with the requirements of subclause 26 (4) of this standard.
Schedule 3 Capital Adequacy Standard
(1) The purpose of the capital adequacy standard, established for the purposes of Division 143 of the Act is to ensure, as far as practicable, that there are sufficient assets in a fund conducted by an insurer to provide adequate capital for the conduct of the fund in accordance with this Act and in the interests of the policy holders of the fund.
(2) The Capital Adequacy Reserve to be calculated under this standard for each fund conducted by an insurer is an assessment of the financial strength of the fund on the basis of an ongoing operation. The Capital Adequacy Reserve must be sufficient for the fund to be expected to remain solvent for at least the next three years after the valuation date, on the basis of assuming future experience during that period in accordance with the best estimate experience underlying the current business plans of the insurer.
This standard applies to each fund conducted by an insurer.
(1) In this standard:
accounting standards means standards made by the Australian Accounting Standards Board.
actuary means the insurer's appointed actuary.
associate in relation to an investor means an entity, including an unincorporated entity, over which the investor has significant influence and that is neither a subsidiary of the investor nor an interest in a joint venture.
authorised deposit-taking institution means a body corporate in relation to which an authority under subsection 9 (3) of the Banking Act 1959 is in force.
average deficit per single equivalent unit (SEU) for each quarter means the amount determined by the Council for each risk equalisation jurisdiction as the gross deficit for the risk equalisation jurisdiction for that quarter divided by the average number of all SEUs for the risk equalisation jurisdiction for that quarter.
best estimate means a best estimate assumption, basis, projection or other best estimate of future experience which is:
(a) made having regard to reasonably available statistics and other relevant information; and
(b) not deliberately or carelessly overstated or understated.
business funding amount means the amount calculated in accordance with Part 8 of this standard.
calculated deficit for a fund means the sum of the estimated amounts for each risk equalisation jurisdiction determined consistently with paragraph 11 (1) (e) of the Private Health Insurance (Risk Equalisation Policy) Rules 2007 at the valuation date.
capital in relation to a fund means the assets of the fund less the reported liabilities of the fund.
capital adequacy insurance liabilities amount means the amount calculated in accordance with Part 6 of this standard.
capital adequacy requirement for a fund means the Capital Adequacy Reserve plus the reported liabilities.
Capital Adequacy Reserve means the amount determined in accordance with subclause 6 (2) of this standard.
central estimate means, if all the possible values of the liability being estimated are expressed as a statistical distribution, the mean of that distribution.
fund means a health benefits fund.
gross deficit means the sum of the estimated amounts for each risk equalisation jurisdiction applicable to the insurer determined consistently with paragraph 11 (1) (b) of the Private Health Insurance (Risk Equalisation Policy) Rules 2007 at the valuation date.
health-related insurance business means health-related business referred to in paragraph 131-15 (1) (b) of the Act where that business is included as business of the fund.
Note: Health-related business referred to in paragraph 131-15 (1) (b) of the Act is the business of undertaking liability, by way of insurance, to indemnify people who are ineligible for Medicare for costs associated with providing treatment, goods or services that are provided to those people in Australia and are provided to manage or prevent diseases, injuries or conditions;
health-related other business means health-related business referred to in subsection 131-15 (1) of the Act where that business does not involve insurance but is included as business of the fund.
inadmissible assets amount means the amount determined in accordance with Part 9 of this standard.
investment entity means an entity whose assets are solely investments, where the sole purpose of the entity is investment activities and where the investor investing in that entity has security directly linked to those assets.
margin means the capital adequacy margin determined in accordance with Part 5 of this standard.
renewal option amount means the amount calculated in accordance with Part 7 of this standard.
reported liabilities means the value of the liabilities of the fund determined at the valuation date in accordance with applicable accounting standards less the amount of subordinated debt that may be counted under clause 34 of this standard .
repealed solvency or capital adequacy standards means the solvency standard or capital adequacy standard, as the case may be, established under the National Health Act 1953 and in force immediately before the commencement of these Rules.
resilience amount means the amount determined in accordance with Part 10 of this standard.
risk equalisation refers to the statutory pooling arrangements for the Risk Equalisation Trust Fund.
solvency obligation has the same meaning as in the solvency standard.
subordinated debt for a fund means the amount determined in accordance with Part 11 of this standard.
subsidiary means an entity, including an unincorporated entity, that is legally or practically controlled by another entity (known as the parent).
this standard means the capital adequacy standard established by these Rules.
valuation date is the day on which a calculation is carried out for the purposes of compliance with this standard.
(2) For the purposes of making calculations required by this standard, the value of assets and liabilities of a fund or insurer are to be determined in accordance with relevant accounting standards.
(3) In this standard, the number of SEUs in respect of a fund is to be calculated by reference to the number of SEUs applying to each category of policy as specified in the Private Health Insurance (Risk Equalisation Policy) Rules 2007 made under the Act.
(1) In this standard, a party is related to an entity if:
(a) directly, or indirectly through one or more intermediaries, the party:
(i) controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries); or
(ii) has an interest in the entity that gives it significant influence over the entity; or
(iii) has joint control over the entity; or
(b) the party is an associate of the entity; or
(c) the party is a joint venture in which the entity is a venturer; or
(d) the party is a member of the key management personnel of the entity or its parent; or
(e) the party is a close member of the family of an individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity.
(2) Close member of the family of an individual means a family member who may be expected to influence, or be influenced by, that individual in their dealings with the entity. They may include:
(a) the individual’s domestic partner and children;
(b) children of the individual’s domestic partner; and
(c) dependants of the individual or the individual’s domestic partner.
Part 2 Capital Adequacy Reserve
(1) An insurer must ensure that at all times the value of the capital of each fund conducted by the insurer equals or exceeds the Capital Adequacy Reserve determined for that fund at the valuation date.
(2) The Capital Adequacy Reserve must be disclosed to the Council.
Note: The Council will use the Capital Adequacy Reserve as an indicator of the longer term financial position of the insurer.
(1) The insurer must determine in accordance with this standard the Capital Adequacy Reserve for each fund conducted by the insurer.
(2) The Capital Adequacy Reserve is determined as the greater of:
(a) the sum of the following amounts:
(i) capital adequacy insurance liabilities amount; plus
(ii) renewal option amount; plus
(iii) business funding amount; plus
(iv) inadmissible assets amount; plus
(v) resilience amount; and
(b) $1.5 million.
If the calculation of any of the amounts set out in subclause 6 (2), or the calculation of any of the components of those amounts under this standard, results in a value less than zero, the amount is to be taken to be zero for the purposes of this standard.
Part 3 Principles
(1) In assessing asset risks under this standard, the insurer is to:
(a) take account of the effective exposure of the fund to various asset classes, regardless of the physical asset holdings of the fund; and
(b) consider exposure to counterparty risks, being the risk that another party to a transaction may default on the agreement, relating, but not limited to, futures and options contracts, swaps, hedges, warrants, forward rate and repurchase agreements.
(2) In the case of investments with an investment entity, the insurer is to consider the exposure of the fund's investments to the underlying assets of the entity.
(1) In applying this standard the insurer must determine whether the amounts calculated under this standard in respect of asset risks should be increased to provide additional assurance that the fund is able to meet its liabilities as and when they fall due.
(2) In deciding whether to increase any amount calculated under this standard the insurer must consider the overall portfolio of assets of the fund, in particular the:
(a) overall diversification of the portfolio, and
(b) liquidity of the portfolio, and
(c) overall exposure to credit risks, including the fund's exposure to any obligor of low credit standing.
(1) The determination of insurance liabilities of the fund under this standard may include allowance for the discounting of future claim payments in accordance with the relevant accounting standards.
(2) For the purposes of this standard, the determination of any discounted insurance liability must adopt a discount rate consistent with, and no greater than, the risk-free rate determined from the market yield available on Commonwealth Government Treasury Bonds for the relevant duration.
(1) Where an insurer is subject to taxation, allowance must be made for taxation in the determination of the capital adequacy insurance liabilities amount and the renewal option amount.
(2) To the extent that any increase in the fund’s liability provisions would generate a corresponding tax benefit, an insurer is to allow for the tax benefit in respect of the cost of the margins held via an adjustment to the relevant reserve.
(1) In calculating the amounts that comprise the Capital Adequacy Reserve for a fund under subclause 6 (2), an insurer:
(a) must strictly comply with the valuation methods set out in this standard for any such amount that is material; and
(b) may adopt an alternative valuation method to calculate any such amount that is immaterial under this Part.
(2) The materiality of an amount is determined by dividing a reasonable estimate of the amount by a reasonable estimate of the capital adequacy requirement, expressing the result as a percentage, and then applying to that result the thresholds set out in subclause (3).
(3) For the purposes of these standards, where the result from subclause (2) in respect of an amount is:
(a) 10% or more-the amount is material; and
(b) 5% or less-the amount is immaterial.
(4) Where an insurer adopts an alternative valuation method in accordance with this Part, the insurer must consider at each subsequent reporting date whether detailed valuations need to be performed to demonstrate the continued appropriateness of any alternative valuation methods.
13. Determination of capital adequacy margin
(1) The insurer must determine in accordance with this clause the capital adequacy margin for the fund, being a margin for risk used in calculations under this standard.
(2) The capital adequacy margin is determined as the sum of the following amounts:
(a) the minimum capital adequacy margin value, being 12.5%; plus
(b) the fund size value calculated in accordance with subclause (3); plus
(c) the additional qualitative margin as determined by the board or equivalent governing body of the insurer using the principles in subclause (5).
Note: While there is no maximum amount for the capital adequacy margin, a high value for the margin would be around 30%.
(3) The fund size value is determined as follows:
|
Factor |
Margin |
|
Fund size, defined as the fund’s total number of hospital SEUs |
|
|
Ø Greater than 199,999 |
+0% |
|
Ø Less than 200,000 and greater than 19,999 |
|
|
Ø Less than 20,000 and greater than 3,999 |
|
|
Ø Less than 4,000 |
+7.5% |
(4) In the table in subclause (3), hospital SEU has the same meaning as in the Private Health Insurance (Risk Equalisation Policy) Rules 2007.
(5) Principles to be applied in the determination of the additional qualitative margin are:
(a) a fund with a large membership base and history of stable membership, stable utilisation rates and stable unit costs may adopt a small additional margin; and
(b) a fund with a small membership base and history of variable membership, variable utilisation rates and variable unit costs must adopt a larger additional margin; and
(c) a fund offering products or benefits for which little credible experience is available in respect of utilisation rates and/or unit costs, and where the overall impact of the product or benefits on the fund has a high degree of uncertainty should increase its additional margin following the release of the products or benefits.
(1) The capital adequacy insurance liabilities amount for a fund is the sum of the following components:
(a) capital adequacy health insurance liabilities component; and
(b) capital adequacy health-related insurance liabilities component.
(1) The capital adequacy health insurance liabilities component for a fund is the sum of the following components calculated in accordance with this standard:
(a) health insurance outstanding claims component; and
(b) risk equalisation outstanding claims component; and
(c) risk equalisation accrued liability component.
(2) The health insurance outstanding claims component for a fund is determined as:
(a) {1 + margin} times the outstanding claims liability in relation to the health insurance business of the fund calculated in accordance with clause 17 of this standard; less
(b) the liability in respect of outstanding claims in relation to the health insurance business of the fund reflected in the reported liabilities of the fund.
(3) The risk equalisation outstanding claims component for a fund is the absolute value of the result of multiplying the margin by the risk equalisation outstanding claims liability calculated in accordance with clause 18 of this standard.
(4) The risk equalisation accrued liability component is the margin multiplied by the calculated deficit of the fund.
(1) The capital adequacy health-related insurance liabilities component for a fund is determined separately for each separate health-related insurance business as:
(a) {1 + margin} times the outstanding claims liability in relation to the health-related insurance business of the fund calculated in accordance with clause 17 of this standard; less
(b) the liability in respect of outstanding claims in relation to the health-related insurance business of the fund reflected in the reported liabilities of the fund.
(1) The outstanding claims liability is the central estimate of the value of the outstanding claims as at the valuation date.
(2) This component includes an allowance for claims-handling expenses.
(3) Outstanding claims are claims that have been reported and have not yet been settled, claims that have been incurred but not yet reported (IBNR), claims that have been incurred but not yet fully settled (IBNER) and claims which have been administratively finalised but which may be reopened.
(4) The outstanding claims liability is to be determined gross of recoveries from the Risk Equalisation Trust Fund.
(5) The valuation method adopted to determine the outstanding claims liability must take appropriate account of:
(a) the historical pattern, over a minimum period of the 12 months immediately prior to the valuation date, of the rate of reporting of claims, the rate of settlement of claims, the development of benefit payments and the impact of refunds of benefit payments; and
(b) trends in utilisation rates and unit costs, especially regarding seasonality and other factors which may influence claims lodgement or processing trends; and
(c) any special features or changes to the ordinary experience, such as changes in benefit design, claims-handling procedures and the mix of products and insured persons.
(1) The risk equalisation outstanding claims liability for a fund is the amount in respect of the outstanding claims mentioned in clause 17 of this standard, determined as:
(a) calculated deficit; less
(b) gross deficit.
(2) The amounts determined in subclause (1) must be determined from a best estimate of the business of the insurer's fund and a best estimate of the risk equalisation trust fund levies for the relevant period.
(3) The amounts are to be determined taking into account the experience of previous quarters, historical seasonal trends, reasonable assumptions in respect of the claims experience of the industry at the risk equalisation jurisdiction level for the fund and reasonable assumptions in respect of the total insured population of the industry at the risk equalisation jurisdiction level.
Part 7 Renewal option amount
(1) The renewal option amount must make provision for the risks and potential costs in providing the right of renewal to policy holders. The renewal option amount is determined based on a separate projection of each health insurance business, health-related insurance business and health-related other business over the 12-month period subsequent to the valuation date (the projection period).
(2) The renewal option amount is determined by the net present value of:
(a) the adjusted projected cash outflow; less
(b) the value of the projected cash inflows.
(3) The adjusted projected cash outflow is determined;
(a) for each health insurance business and health-related insurance business, by adding the projected monthly cash outflow to the sum of:
(i) the product of the projected monthly cash outflow associated with benefit claims and risk equalisation (if applicable) calculated in accordance with this Part and the margin; and
(ii) the product of the projected monthly cash outflow associated with state and territory ambulance levies (if applicable) and management expenses calculated in accordance with this Part and 50% of the margin; and
(b) for each health-related other business, the projected monthly cash outflow associated with the operation of the business of the fund calculated in accordance with this Part.
(4) The rate of interest used for the net present value calculation in subclause (2) is specified in clause 25 of this standard.
(1) Except for the circumstances described in subclause (3), the required business projection for the health insurance business and each health-related insurance business is the current business plan.
(2) Where the current business plan has not been determined on a best estimate basis, the business projection adopted for the purposes of the renewal option amount must be a best estimate projection.
(3) The business projection may be determined either:
(a) as detailed in subclause (5); or
(b) by an actuary.
(4) Where the renewal option amount is determined by an actuary, the actuary must take into account the requirements of this Part in respect of the individual components of the projection.
(5) The business projection must allow for the following:
(a) earned premium income allowing for:
(i) the premium rates reflected in the current business plan; and
(ii) the premiums projected to be paid during the projection period; and
(iii) in the case of health-related insurance business, the projected premiums ceded to reinsurers; and
(iv) the unearned premium liability held at the start of the projection period as income, and the corresponding liability at the end of the period as outgo; and
(v) the premium in arrears asset held at the start of the projection period as outgo, and the corresponding asset at the end of the period as income; and
(b) benefit claims allowing for:
(i) benefit claims outgo based on the claims assumption specified in clause 22; and
(ii) the benefits projected to be paid during the projection period; and
(iii) in the case of health-related insurance business, the projected reinsurance recoveries receivable from reinsurers; and
(iv) the outstanding claims liability held at the start of the projection period as outgo, and the corresponding liability at the end of the period as income; and
(c) administration and all other expense outgo on the expense assumptions specified in clause 24;
(d) for the health insurance business, risk equalisation levy and payments from the Risk Equalisation Trust Fund, as specified in clause 23; and
(e) investment income at the rate specified in clause 25. This is to be based on the unearned premium and outstanding claims liabilities at the start of the period and projected net cash flows during the period. Investment income on fund surplus at the start of the projection period is to be excluded.
(1) The insurer must make a projection of premium income based on premiums for policies as specified in the current business plan.
(2) If the current business plan does not make an allowance for future premium increases, the existing premium rates must be used in the projection.
(3) If current or future premium increases are not immediately applicable to all policy holders, the resulting premium income shortfall is to be allowed for in the projection.
(1) Benefit claims are to be based on the full premium rate irrespective of any actual premium shortfall as this is the basis on which the claims ratios adopted have been specified and determined.
(2) The projected gross benefit claims are to be determined by applying a benefit ratio to the membership and the effective premium rate over the projection period.
(3) The benefit ratio is the greater of:
(a) the equivalent claims ratio used for the purpose of the last premium increase application made in respect of the business; and
(b) the equivalent best estimate claims ratio underlying the current business plans of the insurer in respect of the relevant business; and
(c) the best estimate ratio of the expected claims and, where applicable, risk equalisation levy and payments from the Risk Equalisation Trust Fund to earned premiums underlying the effective premium rate of the business.
(4) The cost of any additional options provided to members must also be allowed for, based on the estimated cost of the options.
(1) Risk equalisation levy and payments from the Risk Equalisation Trust Fund are to be determined separately for the renewal option amount.
(2) In the case of the Risk Equalisation Trust Fund:
(a) payments from the Risk Equalisation Trust Fund related to actual claims experience must be determined based on the relevant component of the benefit claims projected and the lesser of the best estimate ratio of claims recoveries to gross claims, and the actual ratio observed over the previous 12-month period; and
(b) levy payments related to membership profiles, are to be based on the best estimate average deficit per SEU for each quarter of the 12-month period.
(1) Administration and other expenses must be based on the greater of:
(a) the best estimate non-claim expenses ratio of the business over the next 12 months; and
(b) the actual non-claims expense ratio (adjusted to the projected premium rate) over the previous 12 month period.
(2) The non-claims expense ratio is the ratio of all expense outgoings of a business excluding benefit payments and risk equalisation amounts, to the gross premium income of the business.
The rate of investment earnings to be adopted is to be taken as the market yield available on one year Commonwealth Government Treasury Bonds as at the start date of the projection, less one hundred basis points.
(1) Except for those circumstances described in subclause (3), the required business projection for each health-related other business is the relevant current business plan.
(2) Where the relevant current business plan has not been determined on a best estimate basis, the business projection adopted for the purposes of the renewal option amount should be a best estimate projection.
(3) The business projection may be determined either:
(a) as detailed in subclause 20 (5), applying the requirements of this Part to the extent that they are applicable to the health-related other business of the insurer; or
(b) by an actuary.
(4)
(1) The Capital Adequacy Reserve must provide for a reserve in respect of any additional capital likely to be required to ensure that, if experience during the next three years is in accordance with the intended business plans of the insurer, the fund will be able to meet the solvency obligation calculated in accordance with the solvency standard, over those three years.
(2) The business funding amount is determined as:
(a) the additional amount required to ensure that the solvency obligation will be able to be met over the next three years, allowing for any capital released over that period from the existing business of the fund; less
(b) new business capital.
(3) New business capital is the aggregate of:
(a) existing, binding arrangements for the external raising of capital specific to the growth of business within the fund; and
(b) available capital (existing or emerging) in any other health benefits fund of the insurer which is in excess of the Capital Adequacy Reserve of that fund at that time and can be transferred to the fund; and
(c) available capital (existing or emerging) within the insurer but outside the health benefits funds which is in excess of any prudential capital requirement and can be transferred to the fund.
28. Calculation of the inadmissible assets amount
(1) The inadmissible assets amount is the sum of the following components:
(a) an amount in respect of holdings in associate and subsidiary entities calculated in accordance with clause 29 of this standard; plus
(b) an amount in respect of asset concentration risks calculated in accordance with clause 30 of this standard.
(2) Where the inadmissible assets amount is reduced by deferred tax provisions or other liabilities relevant to the inadmissible portion of the assets, the reduction must be only to the extent those provisions or liabilities are assessed as likely to be realised.
(1) The insurer must determine the value of holdings in associate and subsidiary entities that are assets of the fund.
(2) Where an associate or subsidiary is a financial institution subject to prudential regulation that requires the maintenance of minimum capital, the insurer must include in the amount to be calculated under this clause an additional amount that reflects the extent that the value on the investment in the entity in the financial statements includes the prudential capital requirement on the entity.
(1) The asset concentration risks component for a fund is determined as the amount by which the value of any single asset or credit exposure (with a particular obligor or related party) of the fund exceeds the relevant amount specified in subclause (2) or, if subclause (2) is not applicable, the amount by which the value of the asset exceeds 10% of the value of the assets of the fund.
(2) For the following assets the relevant amount is:
(a) 100% of the value of the assets of the fund, where the asset or credit exposure concerned is:
(i) guaranteed by a national government, being the national government of the country in whose currency the liabilities of the fund are denominated; or
(ii) guaranteed by an Australian State or Territory government; and
(b) the greater of 50% of the value of the assets of the fund and $5 million, where the asset or credit exposure concerned is:
(i) guaranteed by an Australian local government or public sector entity; or
(ii) secured by bank bills or deposits with an authorised deposit-taking institution which has net assets of at least $50 million; and
(c) the greater of 25% of the value of the assets of the fund and $5 million, where the asset or credit exposure concerned is secured by deposits with an authorised deposit-taking institution which has net assets of less than $50 million and which is not a related party.
Part 10 Resilience amount
(1) The resilience amount for a fund is to be determined in accordance with the following formula?
where:
|
RA |
= |
resilience amount. |
|
L |
= |
The risk adjusted liabilities of the fund determined by application of this standard to reflect the liability risks prior to the prescribed economic changes. That is, L is equal to the reported liabilities of the fund plus the capital adequacy insurance liabilities amount, plus the renewal option amount, plus the business funding amount. |
|
L’ |
= |
The value of the liabilities after the prescribed economic changes. |
|
f |
= |
A / A’. |
|
A |
= |
Value of the assets of the fund less any inadmissible assets amount determined in accordance with this standard, prior to the prescribed economic changes. |
|
A’ |
= |
Value of those assets of the fund less any inadmissible assets amount determined in accordance with this standard, after the prescribed economic changes. |
(2) The prescribed economic changes are:
|
|
INVESTMENT SECTOR |
PRESCRIBED ECONOMIC CHANGE
FOR CAPITAL ADEQUACY
|
|
1. |
Equities |
Fall in capital value of (35% x DF) |
|
2. |
Property (other than listed property trusts) |
Fall in capital value of (25% x DF) |
|
3. |
Listed property trusts |
Fall in capital value of (25% x DF) |
|
4. |
Interest bearing |
Rise in yield of (2.5% x DF) |
|
5. |
Indexed bonds
|
Rise in yield of (1.0% x DF) |
|
|
|
|
|
|
CURRENCY |
PRESCRIBED EXCHANGE RATE MOVEMENT FOR CAPITAL ADEQUACY
|
|
6. |
All |
15% reduction in value of assets exposed to a denomination other than that of the liabilities. |
where yield means:
(a) for interest bearing securities other than irredeemable securities — redemption yield;
(b) for irredeemable interest bearing securities — running yield; and
(c) for indexed bonds — real yield.
(3) DF is determined in accordance with the following formula?
DF = { Ö (E2 + P2 + F2) } / (E + P + F)
where:
|
E = |
the proportionate holding of admissible assets in the equity sector times 30%. |
|
P = |
the proportionate holding of admissible assets in the property sector times 20%. |
|
F = |
the proportionate holding of admissible assets in the cash and fixed interest sector times 1.5% times the average term to maturity, measured in years, for the sector. |
Part 11 Subordinated debt and alternative sources of capital
(1) The purpose of this Part is to specify:
(a) the terms on which debt qualifies as subordinated debt within the meaning of this Part; and
(b) the amount of subordinated debt that may be counted for the purposes of this standard.
(2) The capital adequacy obligation may be satisfied by either:
(a) shareholders' or members' funds represented by the disclosed capital of a fund, in terms of the retained earnings and capital held within the fund, that are subordinate to the other obligations of the fund; or
(b) the use of alternative sources of capital support for the business of a fund such as subordinated debt, where the obligations to the debt party under the instrument are subordinate to the other obligations of the fund.
(3) Only subordinated debt within the meaning of this Part will qualify as an alternative source of capital for the purposes of this standard.
(4) This Part sets out the terms that an instrument or agreement must contain and the requirements that it must satisfy in order to be subordinated debt within the meaning of this Part.
(1) All proposals to issue or borrow subordinated debt, the purpose of which is, at the time of issue or borrowing, or may be in the future, to contribute to the capital requirements of a health benefits fund, must be submitted to the Council for individual approval if the debt is to be taken into account for the purposes of this standard.
(2) An instrument or agreement of issue of subordinated debt will be assessed once only, prior to the time of issue. The quantum of the proposed issue and timing for draw down will be important items in that assessment. However, separate requirements limit that quantum, to the extent it is subordinated debt within the meaning of this Part, on a continuous basis into the future.
(3) A subordinated debt must be created by a debt instrument or agreement which continuously meets the conditions and requirements set out in subclause (4).
(4) The debt instrument or agreement must provide for the following terms and conditions:
(a) it must have a minimum term of 10 years from the commencement of the loan; and
(b) there must be no circumstances where repayment may be accelerated or called at the lender's or any third party's option; and
(c) interest charged under the instrument or agreement may only be fixed or floating by reference to a benchmark interest rate. The basis for the calculation of interest must be set on a defined non-escalating basis for minimum periods of five years under the instrument or agreement; and
(d) interest bases may include default rate escalation, subject to a maximum of 2% escalation, or where interest is charged at a lower rate when it is paid within a defined period, the lower rate must not be more than 2% less than the highest interest rate payable under the instrument or agreement; and
(e) interest payments are not to be payable where the payment of these would cause the fund to breach the capital adequacy obligation; and
(f) interest payment obligations may be capitalised and interest may be charged on capitalised interest; and
(g) capital repayments are not to be made where the repayment of these would cause the fund to breach the capital adequacy obligation; and
(h) delayed capital repayments may be subject to continuing interest charges, on the interest charge and repayment conditions specified in this subclause.
(1) The maximum amount of subordinated debt that may be counted for the purposes of this standard is the greater of:
(a) 50% of the Capital Adequacy Reserve; or
(b) if subclause (2) applies, the amount calculated under that clause.
(2) If an insurer has an Approved Subordinate Debt, in the meaning of that term in the repealed solvency or capital adequacy standards, the maximum amount for that Approved Subordinate Debt that may counted for the purposes of this standard is the lesser of the approved amount and 50% of the sum of the capital adequacy requirement.
(3) Subclause (2) applies only for an Approved Subordinate Debt that was in existence at the commencement of these Rules and only for so long as the debt complies with the requirements of subclause 33 (4).
1. All legislative instruments and compilations are registered on the Federal Register of Legislative Instruments kept under the Legislative Instruments Act 2003. See www.frli.gov.au