Insurance Act 1973

LLOYD’S SECURITY TRUST FUND DETERMINATION No 1

I, Graeme John Thompson, Chief Executive Officer of the Australian Prudential Regulation Authority, MAKE this determination under subsection 68(1) of the Insurance Act 1973.

Dated 9 June 2000

[Signed]

G J Thompson

Chief Executive Officer

1.           Name of determination

This determination is the Lloyd’s Security Trust Fund Determination    No 1.

2.           Commencement

              This determination commences on the commencement of Schedule 2 (other than item 27) to the Insurance Laws Amendment Act 1998.

3.           Definitions

In this determination:

1992 and prior business means, in relation to an underwriter, all liabilities under contracts of insurance underwritten at Lloyd’s (other than Life Business) and originally allocated to the 1992 year of account or any earlier year of account including, without limitation, any such liabilities reinsured to close into the 1993 or any later year of account, but excluding any liabilities re-signed, or re-allocated pursuant to a premium transfer, into 1993 or any later year.

Act means the Insurance Act 1973.

effective date means the date of commencement of this determination.

final judgment includes an order of an Australian court made to enforce:

              (a)     a judgment of a court of another country; or

              (b)     in Australia, an award of an arbitrator following an arbitration held in Australia or elsewhere.

Life Business has the same meaning as “long term business” in the Insurance Companies Act 1982 of the United Kingdom, as in force on 3 September 1996.

reinsurance to close means an underwriting agreement or arrangement treated by the practices of Lloyd’s as reinsurance to close.

Note   A number of expressions used in this determination are defined in the Insurance Act 1973, including:

APRA

covered

insurance liability

Lloyd’s

qualified corporation

security trust fund.

4.           Security trust funds

(1)         At all times while this determination is in force, Lloyd’s must ensure that security trust fund arrangements, and ancillary or incidental arrangements, in accordance with this determination are in existence.

(2)         There must be 4 security trust funds in accordance with Schedule 1.

(3)         The trust deed for a security trust fund must provide for payment in Australia of final judgments obtained in Australia for insurance liabilities secured by the fund.

(4)         However, the trust deed does not have to provide for payment of exemplary or punitive damages or damages for which a contract of insurance does not expressly provide.

(5)         A contract of insurance or reinsurance that is mentioned in Schedule 1 in relation to a security trust fund may be covered by another security trust fund if APRA thinks it is reasonable, having regard to the reinsurance to close or other underwriting arrangements of Lloyd’s.

5.           Approval of trust deeds

(1)         The trust deed for a security trust fund, or an alteration of such a trust deed, must be approved, in writing, by APRA.

(2)         In deciding whether to approve a trust deed, or an alteration of a trust deed, APRA must have regard to the following matters:

              (a)     the right of a holder of a contract of insurance covered by the fund to enforce payment of a final judgment;

              (b)     the operation, accounting and other practices and reinsurance arrangements of the insurance market conducted by Lloyd’s;

              (c)     the provision made for:

                        (i)     management of the fund if the fund is placed under judicial trusteeship or is wound up or dissolved under the Act; and

                       (ii)     payment of claims if the fund is wound up or dissolved under the Act;

              (d)     whether the fund is established under Australian law and subject to Australian law and the jurisdiction of Australian courts;

              (e)     arrangements for custody and investment of the fund’s assets;

              (f)     any other matter that APRA considers relevant.

(3)         Without limiting the terms of a trust deed for a security trust fund, it may include terms that deal with the following matters:

              (a)     making payment, without final judgment, of a claim in Australia under a contract of insurance covered by the fund;

              (b)     periodic release of assets representing amounts more than the funding needed by the fund;

              (c)     releasing investment income derived from fund assets;

              (d)     suspending payment, in whole or part, of a final judgment or claim if:

                        (i)     the obligations of Equitas Reinsurance Limited are suspended in whole or part; and

                       (ii)     the suspension cannot affect the operation of a scheme for winding up or dissolution of the fund.

6.           Approval of trustees

(1)         A trustee of a security trust fund must be approved by APRA.

(2)         Before approving a trustee of a security trust fund, APRA must be satisfied that:

              (a)     the trustee is a qualified corporation; and

              (b)     the trustee can perform the duties of a trustee of a security trust fund in a proper manner; and

              (c)     the sum of the amount of a bank guarantee, if any, in respect of the trustee’s duties as trustee and the value of the net tangible assets of the trustee is at least $5 million.

(3)         For paragraph (2)(c), a guarantee must:

              (a)     be given by a body corporate whose name appears under the heading “Australian-owned Banks”, “Foreign Subsidiary Banks” or “Branches of Foreign Banks” in the list of authorised deposit-taking institutions published on APRA’s website; and

              (b)     be given in a form approved by APRA; and

              (c)     be subject to a condition that it cannot be revoked unless APRA approves.

7.           Funding

(1)         The assets of a security trust fund must:

              (a)     be assets in Australia; and

              (b)     be unencumbered, except for fees and expenses of:

                        (i)     the trustee in accordance with the trust deed; or

                       (ii)     investment transactions on ordinary commercial terms; and

              (c)     have a value that meets the funding requirement mentioned in Schedule 2 for the trust.

(2)         For subclause (1), an asset must be valued in accordance with the Lloyd’s Security Trust Fund Rules No 1.

8.           Information

(1)         The trustee of a security trust fund must be given enough information to allow the trustee to operate the trust according to its terms and the requirements of the Act.

(2)         There must be arrangements that allow Lloyd’s to provide information, accounts, statements and actuarial reports required by the Act.

9.           Records

(1)         Records that allow accounts and statements to be prepared and audited properly and conveniently must be kept for 7 years after the completion of the transactions to which they relate.

(2)         Lloyd’s must give or cause to be given to APRA the accounts and statements mentioned in Schedule 3 in the form, for the periods and within the time mentioned in Schedule 3.

(3)         The accounts and statements mentioned in Schedule 4 must be audited by an auditor who is approved by APRA.

(4)         An audit certificate must be given to APRA in the form and within the time mentioned in Schedule 4.

10.         Notices

(1)         Lloyd’s must give or cause to be given to APRA written notice of the following matters:

              (a)     intention to change a trustee of a security trust fund;

              (b)     failure of a security trust fund to comply with subclause 7(1);

              (c)     default of more than 30 days in payment to the trustee of the security trust fund for its services.

(2)         For the purposes of paragraph (1)(b), a breach of paragraph 7(1)(c) is taken to have occurred if, and only if:

              (a)     for a syndicate year of account in the new business fund—the deficiency is more than $1,000 and is also more than 5% of the funding requirement for the syndicate year of account;

              (b)     for any security trust funds other than the reserve fund—the deficiency is more than $500,000;

              (c)     for the reserve fund—the deficiency is more than $10,000.

11.         Agreements

Lloyd’s must give or cause to be given to APRA on request a copy of every agreement about the operation of a security trust fund.

12.         Review of APRA’s decisions

Part VI of the Act applies to a decision of APRA under this determination.

                                                          schedule 1                                    Subclause 4(2)

Security trust funds

1.1         Definitions

In this Schedule:

registered office has the meaning given by the Corporations Law.

1.2         Equitas fund

(1)         The Equitas fund is a security trust fund in respect of the liabilities under contracts of insurance or reinsurance of the kind mentioned in subclause (2).

(2)         Subclause (1) applies to a contract if:

              (a)     it covers liabilities that are:

                        (i)     1992 and prior business that is reinsured by Equitas Reinsurance Limited; or

                       (ii)     other business that is reinsured (directly or indirectly) from time to time by Equitas Reinsurance Limited; and

              (b)     Division 15 of Part III of the Income Tax Assessment Act 1936 as in force immediately before the effective date, as modified by paragraph 10 of the Schedule to the Act as in force immediately before the effective date, applied to the premiums; and

              (c)     the premiums were not paid or payable in United States of America dollars.

1.3         Interim fund

(1)         The interim fund is a security trust fund in respect of liabilities under contracts of insurance or reinsurance of the kind mentioned in subclause (2).

(2)         Subclause (1) applies to a contract if:

              (a)     it is written, or has a date of inception of risk, before 1 July 1998; and

              (b)     it is not business of a kind mentioned in paragraph 1.2(2)(a); and

              (c)     Division 15 of Part III of the Income Tax Assessment Act 1936 as in force immediately before the effective date, as modified by paragraph 10 of the Schedule to the Act as in force immediately before the effective date, applies to the premiums; and

              (d)     the underwriter is liable, as a member of a syndicate for a year of account of the syndicate, to members of the syndicate, or another syndicate, for an earlier year of account under reinsurance to close; and

              (e)     the premiums were not paid or payable in United States of America dollars.

1.4         New business fund

(1)         The new business fund is a security trust fund in respect of the liabilities under contracts of insurance or reinsurance of the kinds mentioned in subclauses (2) and (3).

(2)         Subclause (1) applies to a contract if:

              (a)     it is expressed, and the premium is payable, in Australian dollars; and

              (b)     it has a date of inception of risk on or after 1 July 1998; and

              (c)     it is a contract:

                        (i)     that is underwritten for a year of account on or after 1 July 1998; or

                       (ii)     for which the underwriter is liable, as a member of a syndicate, for a year of account of the syndicate, to members of the syndicate or any other syndicate for an earlier year of account under a reinsurance to close; and

              (d)     it is:

                        (i)     a contract for the insurance of real property, fixtures or buildings in Australia; or

                       (ii)     a contract for the insurance of any other property or risk if the insured is:

                                    (A)   a body corporate that has a registered office or principal place of business in Australia; or

                                    (B)   a person, other than a body corporate, that has a residential address or place or business in Australia; or

                      (iii)     a contract of reinsurance and:

                                    (A)   the registered office of the ceding company that has reinsured with Lloyd’s underwriters is in Australia; or

                                    (B)   the ceding company that has reinsured with Lloyd’s underwriters is not incorporated in Australia but the contract is entered with a branch office in Australia of that company.

(3)         Subclause (1) also applies to a contract that is initially covered by the interim fund and reinsured under reinsurance to close with a syndicate for the 1998, or a subsequent, year of account.

1.5         Reserve fund

(1)         The reserve fund is a security trust fund in respect of:

              (a)     the same liabilities as the new business fund; and

              (b)     liabilities under contracts of insurance or reinsurance of the kind mentioned in subclause (2); and

              (c)     rights the Treasurer would have been entitled to exercise under section 94 of the Act (as in force immediately before the effective date) in relation to rights acquired or accrued under the Act immediately before the effective date.

(2)         Paragraph (1)(b) applies to a contract if:

              (a)     it would be a contract of the kind mentioned in subclause 1.3(2) if paragraph 1.3(2)(a) were amended by omitting “before 1 July 1998” and substituting “before the effective date”; and

              (b)     it is not a contract of the kind mentioned in subclause 1.3(2), 1.4(2) or 1.4(3).

                                                          schedule 2                               Paragraph 7(1)(c)

Funding requirements

2.1         Definitions

In this Schedule:

quarter means 3 months starting on 1 January, 1 April, 1 July or 1 October.

year means 12 months starting on 1 January.

2.2         Rebalancing period

Following the end of a rebalancing period:

              (a)     further funding must be arranged within 60 days to meet any shortfall between the value of assets and the funding requirement; and

              (b)     funds in excess of the funding requirement can be released from the trust.

2.3         Equitas fund

(1)         For the Equitas fund:

              (a)     the rebalancing period is each quarter; and

              (b)     the funding requirement is:

                        (i)     on the effective date—the amount worked out in accordance with subclause (2) for the last quarter that ended more than 30 days before the effective date; and

                       (ii)     for a quarter ending after the effective date—the amount worked out in accordance with subclause (2) for that quarter.

(2)         The funding requirement for a quarter is:

(liabilities ´ scaling factor%) + $2 million

where:

liabilities means the reported gross of reinsurance outstanding claims liabilities on the last day of the rebalancing period.

scaling factor is an amount determined by APRA so that the result of the formula is a reasonable estimate of the value of aggregated secured liabilities on the last day of the rebalancing period:

              (a)     gross of reinsurance; and

              (b)     discounted to allow for the time value of money; and

              (c)     including liabilities incurred but not reported.

2.4         Interim fund

(1)         For the interim fund:

              (a)     the rebalancing period is each year; and

              (b)     the funding requirement is:

                        (i)     on the effective date—the amount worked out in accordance with subclause (2) for the last year that ended more than 30 days before the effective date; and

                       (ii)     for a year ending after the effective date—the amount worked out in accordance with subclause (2) for that year.

(2)         The funding requirement for a period is:

              (liabilities ´ scaling factor₁%) + (premium income ´ scaling factor₂%)

where:

liabilities means the reported gross of reinsurance outstanding claims liabilities on the last day of the rebalancing period.

premium income means premium income, net of brokerage but gross of reinsurance ceded, for the years of account for which the liabilities are secured by the fund.

scaling factor₁ and scaling factor₂ are amounts determined by APRA so that the result of the formula is a reasonable estimate of the value of aggregated secured liabilities on the last day of the rebalancing period:

              (a)     net of reinsurance; and

              (b)     discounted to allow for the time value of money; and

              (c)     including liabilities incurred but not reported.

2.5         New business fund

(1)         For the new business fund:

              (a)     the rebalancing period is each quarter; and

              (b)     the funding requirement is:

                        (i)     on the effective date—the amount worked out in accordance with subclause (2) for the last quarter that ended more than 30 days before the effective date; and

                       (ii)     for a quarter ending after the effective date—the amount worked out in accordance with subclause (2) for that quarter.

(2)         The funding requirement for a quarter is, in respect of each syndicate year of account with liabilities secured by the fund (other than a closed year of account of a syndicate):

              (liabilities ´ scaling factor₁%) + (premium income ´ scaling factor₂%)

where:

liabilities means the reported gross of reinsurance outstanding claims liabilities for the year of account of the syndicate on the last day of the rebalancing period.

premium income means premium income, net of brokerage but gross of reinsurance ceded, for the syndicate for the open year of account of the syndicate for which the liabilities are secured by the fund.

scaling factor₁ and scaling factor₂ are amounts determined by APRA so that the result of the formula is a reasonable estimate of the value of aggregated secured liabilities on the last day of the rebalancing period:

              (a)     net of reinsurance; and

              (b)     discounted to allow for the time value of money; and

              (c)     including liabilities incurred but not reported.

(3)         For subclause (2), a syndicate year of account is closed if all the liabilities of the syndicate for that year of account have been reinsured under reinsurance to close.

2.6         Reserve fund

For the reserve fund:

              (a)     the rebalancing period is each year; and

              (b)     the funding requirement is:

                        (i)     on the effective date – $3 million;

                       (ii)     for a year ending after the effective date – the greater of:

                                 (A)    6% of the aggregate funding requirement of the new business fund; or

                                 (B)    $3 million.

.

                                                          schedule 3                                    Subclause 9(2)

accounts and statements

PART 1—COMMENTARY

1.       The accounts and statements required for subclause 9(2) are:

(a)   Form L1—Underwriting Account for Insurance Business in Australia (to be lodged annually within four months of the balance date); and

(b)   Form L2—Underwriting Analysis by Class of Insurance Business (to be lodged annually within four months of the balance date); and

(c)   Form L3Q—Quarterly Statement of Reported Claims Outstanding for 1992 and Prior Business—“Equitas Fund” (to be lodged for each quarter defined in clause 2.1 of Schedule 2 and within 45 days of the quarter end); and

(d)   Form L4Q—Quarterly Statement of Premiums and Claims for 1/1/93 to 30/6/98 Business—“Interim Fund” (to be lodged for each quarter defined in clause 2.1 of Schedule 2 and within 45 days of the quarter end); and

(e)   Form L5Q—Quarterly Statement of Premiums and Claims for Aggregate Business on and from 1/7/98—“New Business Fund” (to be lodged for each quarter defined in clause 2.1 of Schedule 2 and within 45 days of the quarter end);

as set out in Part 2.

2.       Dollar amounts are to be rounded to the nearest multiple of $1,000.  For example, $10,500 is to be rounded down to $10,000 and $10,501 is to be rounded up to $11,000.

3.       The statements are to be completed in accordance with any directions noted on the form and are to be signed by the Australian Agent.

PART 2—FORMS

FORM L1

FORM L2

Year Ended 31/12/.......

FORM L3Q

FORM L4Q

FORM L5Q

                                                          schedule 4                       Subclauses 9(3) and (4)

Audited accounts and statements

PART 1—COMMENTARY

1.       The audited accounts and statements required for subclause 9(3) are:

(a)   Form L3—Annual Statement of Reported Claims Outstanding for 1992 and Prior Business—“Equitas Fund” (to be lodged within 4 months of the balance date); and

(b)   Form L4—Annual Statement of Premiums and Claims for 1/1/93 to 30/6/98 Business—“Interim Fund” (to be lodged within 4 months of the balance date); and

(c)   Form L5—Annual Statement of Premiums and Claims for Aggregate Business on and from 1/7/98—“New Business Fund” (to be lodged within 4 months of the balance date);

as set out in Part 2.

2.       Dollar amounts are to be rounded to the nearest multiple of $1,000.  For example, $10,500 is to be rounded down to $10,000 and $10,501 is to be rounded up to $11,000.

3.       The statements are to be completed in accordance with any directions noted on the pro forma and are to be signed by the Australian Agent.

4.       For subclause 9(4), an audit certificate in the form set out in Part 3 must be lodged within 4 months of the annual balance date.

part 2—forms

FORM L3 (AUDITED)

FORM L4 (AUDITED)

FORM L5 (AUDITED)

PART 3—MODEL STATEMENT

Insurance Act 1973

Lloyd’s Security Trust Fund Determination No 1

INDEPENDENT AUDIT REPORT

Scope

I have audited the attached special purpose statements (Forms L3, L4 and L5) of [name of fund], insofar as they relate to net premiums, gross known outstanding claims and gross claims paid, in respect of liabilities under contracts of insurance defined for the purposes of the Insurance Act 1973 (the Act) under the Lloyd’s Security Trust Fund Determination No 1 (the Determination), made under subsection 68(1) of the Act, for the year ended [date].

Lloyd’s is responsible for the preparation of the statements and the information they contain in accordance with the reporting requirements of the Act.  I have conducted an independent audit of the statements in order to express an opinion on them for the purposes of the Act and Determination.

The statements have been audited in accordance with applicable auditing standards to provide reasonable assurance that they are free of material misstatement.  The procedures included examination, on a test basis, of evidence supporting the amounts reported and their proper identification.  The procedure has been undertaken to form an opinion whether, in all material respects, the statements are presented fairly in accordance with the requirements of the Act and Determination.

Audit Opinion

In accordance with the Insurance Act 1973 and the Lloyd’s Security Trust Fund Determination No 1, I report that:

·        in my opinion, the statements appear to be in accordance with the provisions of the Act and Determination;

·        in my opinion, to the extent of the purposes specified above, the accounting records of Lloyd’s appear to have been properly kept and to record and identify correctly the net premiums, gross known outstanding claims and gross claims paid for the purposes of clauses 1.2, 1.3 and 1.4 of the Determination;

·        I have obtained all the information and explanations requested from Lloyd’s; and

·        I am satisfied that the statements agree with the accounting records of Lloyd’s for the purposes specified and the information therein appears truly to represent the premiums, claims outstanding and claims paid for the year ended [date] in accordance with the Determination.

[Signature]

[Name]

Approved Auditor under the Insurance Act 1973

[Date]