29 October 2015
To: All general insurers and other interested parties
RESPONSE TO SUBMISSIONS – CONSULTATION
REQUIREMENTS FOR GENERAL INSURERS
ON
EXTERNAL
PEER
REVIEW
Background
In April 2015, APRA released a consultation letter outlining its proposal to amend the
requirements in Prudential Standard GPS 320 Actuarial and Related Matters (GPS 320)
relating to the external peer review of the Appointed Actuary’s Insurance Liability
Valuation Report (ILVR).
APRA proposed to remove the mandatory annual requirement in GPS 320 to seek a review
report but retain the ability to request a review report be undertaken in circumstances
where APRA considers it appropriate.
During 2014, APRA held a number of discussions with industry bodies regarding potential
ways to reduce annual regulatory compliance costs. The review report requirement was
identified as an area where regulatory compliance costs could be reduced. APRA notes
that the review report requirement served an important prudential purpose when it was
introduced, and has driven improvement in practices in the general insurance industry
since its introduction. As a result, it was timely to review the continued need for the
review report requirement. In the consultation letter, APRA recognised that there was
prudential value in the review report, but considered that, on balance, regulatory
compliance cost savings could be obtained through the removal of this requirement
without compromising the soundness of the prudential framework.
This letter addresses issues raised by submissions to the consultation and outlines the next
steps.
Consultation summary
APRA received 17 submissions in response to the consultation letter and APRA’s proposed
amendments to GPS 320. The consultation drew submissions from general insurers,
actuarial service providers and other interested parties such as the Insurance Council of
Australia and the Actuaries Institute.
Ten submissions were marked non-confidential and seven were confidential. The nonconfidential submissions are available on APRA’s website.
APRA’s proposal received overall support from general insurers. Several general insurers
noted that the value of the review report had diminished over time or that, from their
perspective, the costs of the review report outweighed the benefits obtained from a risk
management perspective.
Actuarial service providers and the Actuaries Institute were generally not supportive of
APRA’s proposal. These submissions pointed to a number of benefits that the peer review
process provides and also noted that some of the expected cost savings were likely to be
offset by an increase in external audit costs, as the review report would no longer be
available for use by auditors to inform their work on the insurance liability valuation.
Some submissions suggested alternatives to APRA’s proposal, including providing
exemptions to general insurers who meet certain criteria, reducing the frequency of the
review report or expanding the role of the board to consider whether a review was
required.
Other issues raised included implementation timing, clarification of the period for
completing the review report and consideration of the introduction of a peer review
requirement for the life insurance industry.
Submission analysis
Retaining the annual mandatory requirement
As noted above, some submissions opposed the amendments proposed in the consultation
and generally preferred that the annual review report requirement be retained. These
submissions pointed out that the peer review process is beneficial for general insurers
both from a governance perspective and in providing another ‘line of defence’. It was also
suggested that the removal of the review report requirement from GPS 320 would, over
time, erode improvements in the quality of the ILVR that APRA has seen since it was
introduced.
APRA noted in the consultation letter that there was value in the peer review process but
material findings by the Reviewing Actuary were not common. The overwhelming response
from general insurers was that the cost of complying with the requirement outweighs the
benefits of a mandatory review report requirement.
Other feedback received from general insurers noted that in the absence of a mandatory
requirement, boards and senior management would periodically consider the necessity of
a review report given their circumstances. Additionally, some general insurers noted that
they would continue to request a review report, albeit with a more targeted or limited
scope. Feedback also noted that there are other methods that general insurers can adopt
to seek comfort that the Appointed Actuary’s ILVR is appropriate, such as review by
internal actuaries and committees.
APRA response
After considering feedback received in the consultation and weighing the costs and
benefits of removing the requirement, APRA continues to be of the view that removing the
annual review requirement as proposed is appropriate. APRA considers that the costs of
the annual review requirement exceed the prudential benefits, and that the requirement
can be removed without compromising the soundness of the prudential framework. APRA
will retain the ability to request a review report be undertaken in circumstances where
APRA considers it appropriate. Further, as APRA stated in the consultation letter, APRA
strongly encourages boards of general insurers to carefully consider their position before
discontinuing the review report.
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Retain requirement and enable exemptions with APRA approval
Some submissions proposed that APRA maintain the review report requirement but allow
general insurers to apply to APRA for an exemption from the yearly process.
APRA response
APRA notes that the inclusion of an exemption clause in GPS 320 would require general
insurers to carefully consider their circumstances prior to applying to APRA for an
exemption. However, APRA considers that this outcome would be less efficient compared
with APRA’s preferred approach, as stated above, and would not be consistent with
APRA’s objective of reducing regulatory compliance costs without compromising the
soundness of the prudential framework. It would involve significant cost and effort for
insurers, and for APRA, limited prudential benefit. The additional cost and effort may
deter insurers from applying for an exemption, thus potentially materially reducing the
regulatory compliance cost savings.
APRA considers that the removal of the annual review requirement remains appropriate
and therefore has not amended its approach.
Less frequent reviews
Some submissions requested that APRA consider retaining the mandatory requirement but
on a less frequent basis, such as a triennial review rather than an annual review.
APRA response
A mandatory triennial review approach would result in regulatory compliance cost savings
while retaining the benefits of a peer review, albeit every three years. Such an approach
would not, however entirely align with the objective of reducing regulatory compliance
costs without compromising sound prudential outcomes, given APRA has already
determined that completely removing the mandatory peer review would not compromise
the soundness of the prudential framework and moving to a triennial review would
materially reduce the cost savings. An infrequent or irregular peer review may also cost
more on a ‘per review’ basis than the current framework, further reducing the regulatory
cost savings. APRA’s proposed approach is more risk-based and achieves a larger reduction
in compliance costs. It includes the important prudential safeguard of APRA’s ability to
request a review report and encourages the general insurer to consider whether to
commission a review report having regard to its own circumstances. On this basis, APRA
does not support maintaining the peer review requirement with a reduced frequency.
Role of the board
APRA strongly encouraged general insurers to involve their boards in considering the issues
raised in the consultation paper, and welcomed the views of boards on the issues raised.
The role of the board in commissioning a review report was discussed in several
submissions. In particular, it was noted that, if APRA removes the mandatory requirement
some boards would continue to commission a review report, potentially with a narrower,
more targeted approach, or would seek advice from external actuaries when appropriate.
Submissions suggested that APRA provide guidance to boards as to what factors might be
relevant in deciding whether to commission a review report. This guidance would also
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assist general insurers in understanding when APRA may request that a review report be
completed.
APRA response
APRA notes the response from some general insurers indicating that their boards would be
taking an active role in determining whether a review report is required in the future.
Aside from reducing regulatory costs, APRA was seeking to give general insurers more
flexibility to tailor their approach to reviewing the Appointed Actuary’s ILVR. APRA
reiterates that active involvement of the board is appropriate in deciding whether to
continue to commission review reports and the scope of any reviews.
APRA has considered whether it would be appropriate to provide guidance to boards as
suggested by submissions. At this time, APRA does not consider it necessary to provide
further guidance. APRA will observe the changes in insurer practice in response to the
revisions to GPS 320 and will monitor whether guidance may be appropriate. APRA’s
ongoing review of the role of the appointed actuary will provide an opportunity to further
assess the need for guidance in due course.
Other issues
A number of other issues raised in submissions are addressed in this section.
Implementation timing
A submission raised the possibility of delaying the implementation of any changes to GPS
320 until 30 June 2016, on the basis that insurers may already have commissioned a review
report for the financial year ending 31 December 2015.
APRA response
APRA does not consider there is a strong argument to delay the implementation of changes
to GPS 320. APRA’s intention is to make the cost saving available to general insurers as
soon as possible. Some general insurers may have commissioned, or be in the process of
commissioning, a review report. Where this is the case, general insurers may decide
whether to proceed with those reviews having regard to their own circumstances, even
though APRA will have removed the mandatory requirement for that period.
Timeframe for completing the report
A submission suggested that the three month timeframe, proposed in GPS 320, for
completing the review report after it is commissioned be amended to the later of three
months after the date of commission and the balance date of the general insurer, as many
reports are commissioned well ahead of the balance date.
APRA response
APRA agrees that the timeframe for submission of the review report should not depend on
the date it is commissioned. Accordingly, APRA has amended the wording of paragraph 75
in the final version of GPS 320 such that the “Reviewing Actuary must submit the review
report to the parties specified in paragraph 74 by the time the ILVR is submitted to APRA
unless another time is specified by APRA in writing”. This amendment achieves the same
outcome as the approach suggested in submissions. It ensures that the timing of the
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review report, should one be requested by APRA, is aligned with other annual reporting
requirements1, and that an insurer is not penalised for commissioning the review report
ahead of the balance date.
Conclusion and next steps
In summary, APRA has assessed all submissions received and has decided to proceed with
the approach outlined in the consultation letter. As proposed, APRA has removed the
requirement for an annual external peer review of the ILVR but retains the right to require
preparation of a review report on prudential grounds. APRA has made a minor change to
the proposed approach to address industry comments regarding the due date for
submission of a review report if one is required by APRA. APRA considers that this
approach achieves material regulatory cost savings without compromising the soundness of
the prudential framework.
The final amended version of GPS 320 has been provided with this response letter and can
be found at: http://www.apra.gov.au/GI/Pages/External-Peer-Review-Appointed-ActuaryILVR-October-2015.aspx. The new Prudential Standard will apply to general insurers from
31 December 2015.
Yours sincerely
Sarah Goodman
Executive General Manager
Policy and Advice Division
1
Unless APRA specifies an alternative timeframe for the review report in writing.
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