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No. 1 of 2003 Guides & Guidelines as made
Guidelines on matters to be included in a funding plan relating to medical indemnity insurance for the purposes of subsection 13(3) of the Medical Indemity (Prudential Supervision and Product Standards) Act 2003.
Administered by: Treasury
Registered 24 Mar 2006
Tabling HistoryDate
Tabled Senate11-Aug-2003
Tabled HR11-Aug-2003
Gazetted 13 Aug 2003
Date of repeal 29 Mar 2012
Repealed by Instrument Revoking Guidelines No. 1 of 2012

Australian Prudential Regulation Authority

 

Medical Indemnity (Prudential Supervision and Product Standards) Act 2003

 

INSTRUMENT ISSUING GUIDELINES

No 1 of 2003

 

MADE UNDER SUBSECTION 13(9)

 

 

I, Charles Watts Littrell, a delegate of the Australian Prudential Regulation Authority, under subsection 13(9) of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 ISSUE the following guidelines, which are set out in the Schedule:

                        Guidelines: Matters to be Included in a Funding Plan.

 

 

 

 

 

Dated 6 August 2003

 

 

 

 

Charles Littrell

Executive General Manager

Policy, Research and Consulting Division


GUIDELINES

 

 

MATTERS TO BE INCLUDED IN A FUNDING PLAN

 

 

 

 

Background

 

1.   A body corporate, being either:

 

(a)  a Medical Defence Organisation (MDO) within the meaning of the  Medical Indemnity  (Prudential  Supervision  and  Product  Standards)  Act  2003  (the Act); or

 

(b)  a body corporate prescribed in the Medical Indemnity (Prudential Supervision and Product Standards) Regulations 2003 (the Regulations); or

 

(c)  a body corporate related to a body corporate mentioned in (a) or (b);

 

may apply to APRA, under subsection 13(1) of the Act, for a determination under subsection 13(3) of the Act that the minimum capital requirements1 do not apply to the body corporate during 1 July 2003 to 30 June 2008 (the transition period).

 

2.   APRA can only make a determination under subsection 13(3) of the Ac t where, at the time of application by the body corporate, the body corporate:

 

(a)  is not a general insurer  under the Insurance Act 1973 (Insurance Act), or is a general insurer and is prescribed by the Regulations ; and

 

(b)  does not, or would not during the transition period, comply with the minimum capital requirements; and

 

(c)  lodges a funding plan that:

 

(i)      is in the form prescribed by the Regulations;

 

(ii)    is certified by an independent auditor and independent actuary; and

 

(iii)  complies with guidelines issued by APRA.

 

3.   APRA can not make any determinations on or after 1 July 2005.

 

Purpose

 

4.   These guidelines set out the matters to be included in a funding plan lodged for the purposes of subsection 13(3) of the Act.

 

 

 

 

 

 

1  Minimum  capital  requirements  are  those  prescribed  b Prudential Standard GPS 110 Capital

Adequacy for General Insurers made under section 32 of the Insurance Act 1973.

 

 

 

1                                                             6 August 2003


Authority

 

5.   These guidelines are made under paragraph 13(9)(a) of the Act.

 

Funding Plan

 

6.   A  funding  plan  is  required  when  a  body  corporate  does  not  at  the  time  of application, or would not during the transition period, meet the minimum capital requirements.        Accordingly,  a  funding  plan  should  establish  methods  and measurable targets to achieve compliance with the  minimum capital requirements during  the  transition period.                A funding plan must demonstrate that the body corporate  will  be  able  to  meet  the  minimum  capital  requirements,  and  any additional capital requirement imposed by APRA, by  no later than  the end of the transition period.

 

7.   A  funding  plan  should  therefore  reflect  planned   developments  in  the  body corporate’s operating environment, forecast results and  specify measures to be undertaken where targets are not met.

 

8.   A  funding plan is not a substitute for a  business plan.  A business plan is an important management and control tool that enables a company to communicate its strategic direction and objectives, identify opportunities in the market place, forecast results and  establish benchmarks.  A sound business plan also needs to consider the impact of differing assumptions or scenarios on the  body corporate’s financial position.  A business plan is required by  Prudential Standard GPS 220

Risk Management for General Insurers.

 

Elements of a funding plan

 

Capital position

 

9.   A funding plan must detail the capital position of the body corporate at the time of application or at the nearest time for which accounts have been prepared.  The capital position must be calculated in accordance with  the Prudential Standards made under the Insurance Act.2

 

Methods of capital growth

 

10. A funding plan must  detail what method, or methods, will be used to increase the capital of the body corporate during the transition period.  These methods may, for example, include the methods detailed in paragraphs 11-17.

 

Organic growth of capital

 

11. This method of capital growth would be achieved through the normal business operations of the body corporate.  Profitability, through underwriting, expense control and investments, enable s a body corporate to accumulate retained earnings and therefore strengthen its capital position.

 

 

 

2 Refer Prudential Standard GPS 110 Capital Adequacy for General Insurers and Prudential Standard

GPS 210 Liability Valuation for General Insurers.

 

 

 

2                                                             6 August 2003


12. This method  must  be  supported  by  appropriate  financial  projection with measurable and achievable targets.

 

Raise additional capital

 

13. Depending on the corporate structure of the body corporate, this method may involve transactions such as a capital injection from a parent entity or entities, or capital raising through the issue of shares or other capital instruments.

 

14. Where a capital injection is the method to be utilised, evidence will be required to illustrate that contractual arrangements have been put in place with the funding entity and that the funding entity has the available funds, or the ability to raise funds, to fulfil these contractual obligations.

 

15. This  method  must  be  supported  by  appropriate  financial  projections  with measurable and achievable targets.

 

Restructure business

 

16. A body corporate may be able to restructure its  business strategies, business mix, asset portfolio and reinsurance  arrangements to generate a lower minimum capital requirement.  A lower minimum capital requirement may enable a body corporate to meet the minimum capital requirements immediately, or may  require the body corporate to  increase its capital base by a smaller amount than would have been required if no restructure occurred.

 

17. This method  must  be  supported  by  appropriate  financial  projections  with measurable and achievable targets.  It must also be supported by details on how and when the current business will be restructured.

 

Measurable targets

 

18. A funding pla must  set  measurable  and  identifiable  targets  supported  by appropriate financial projections to illustrate how these targets are to be achieved. Targets must be set on a quarterly basis and a funding plan must require the body corporate to report to APRA on the compliance or otherwise with those targets.3

 

19. At the absolute minimum, a funding plan must set targets for the minimum capital to be achieved at the end of each quarter.  Other targets may be set for matters such as premium revenue, investment revenue, reinsurance expenses and other operating expenses.

 

20. Targets that relate to minimum capital must be set at levels that:

 

(a)  take into account, and are reflective of, the underlying risk profile of the body corporate; and

 

(b) will enable the body corporate to meet insurance and other liabilities as they fall due; and

 

 

 

3 For reporting requirements see paragraphs  30-35.

 

 

 

3                                                             6 August 2003


(c)  will not adversely affect policyholders.

 

21. The maximum available transition period is five years, however APRA will not accept a funding plan that aims to increase capital  resources within the final year of the transition period only A funding plan must demonstrate a commitment to steady, if not immediate, capital growth over the transition period to support the business risks and ensure that compliance with minimum capital requirements will occur by the end of the transition period.

 

Measures to address non-compliance with targets

 

22. A funding plan must specify what types of  measures will be taken by the body corporate should there be a failure to meet specified targets.  This will ensure that the body corporate has considered the possibility that targets will not be met and has developed appropriate strategies to address non-compliance.

 

23. At a minimum, the funding plan must provide for reporting to the Board, at least in line with reporting to APRA,4 of a failure to meet the specified targets.  A body corporate should have in place appropriate management information systems and controls to support the monitoring and required reporting functions of the funding plan.  These systems and controls should be reflected in the body corporate’s Risk Management Strategy as required in accordance with Prudential Standard GPS

220 Risk Management for General Insurers.

 

24. Specific measures to address the non-compliance may include:

 

(a)  using an alternative method to increase capital to the targeted level;

 

(b) revising projections and targets;

 

(c)  altering reinsurance arrangements; and

 

(d) ceasing to undertake new business until targets have been met.

 

25. In addition to identifying such measures, the funding plan should also identify the systems and procedures in place to support carrying out the specified measures.

 

Financial projections

 

26. A funding plan  must  use  financial  projections  to  support  targets.             Financial projections should be undertaken on a best estimates basis, and the funding plan should identify the key risks that may impact on the achievement of the targets by the body corporate.  A funding plan should therefore:

 

(a)  be based on projections prepared using  assumptions that are consistent with the assumptions underlying the  liability values calculated in accordance with Prudential Standard GPS 210 Liability Valuation for General Insurers;

 

 

 

 

 

 

4 See paragraphs 30 -35.

 

 

 

4                                                             6 August 2003


(b) use  projections  that  are  based  on  assumptions  that   are  reasonable  and appropriate  having  regard  to  the  actual  experience  and  data  of  the  body corporate;

 

(c)  use projections that are based on quarterly periods; and

 

(d) incorporate, to the extent possible,  projections thaindicate the sensitivity of projections to the key risks identified.

 

No reduction in capital

 

27. A  funding  plan  must  not  permit  a  reduction  in  capital,  unless  prior  APRA

approval is obtained.  A reduction in capital includes, but is not limited to:

 

(a)  repatriation to a parent entity;

 

(b) share buybacks;

 

(c)  the  redemption,  repurchase  or  early  repayment  of  any  eligible  capital instruments issued by the body corporate or a special purpose vehicle;

 

(d) trading in own shares; and

 

(e)  interest and dividend payments.

 

28. APRA will only consider granting  approval for a reduction in capital where a body corporate can demonstrate to APRA that such a reduction will not adversely affect policyholder interests.  APRA’s approval may be subject to conditions.

 

29. In no circumstances will APRA allow a capital reduction where a body corporate is not meeting targets specified in its funding plan.

 

Reporting

 

30. A funding plan must include a specified commitment by the body corporate to report to APRA, in writing, whether the target or targets set out in the funding plan have been met Where specified targets have not been met, the report must identify these and must also identify the measure or measures that have been, or will be, used to address the non-compliance and achieve the targets.

 

31. Reporting must be on both a quarterly and annual basis.

 

Quarterly reporting

 

32. A report must be submitted to APRA within 20 business days after the end of each

3 month reporting period (based on the financial year of the body corporate).  This report must be signed by the Principal Executive Officer5 or the Chief Financial Officer (whatever his or her official title may be) of the body corporate.

 

 

 

5 Principal Executive Officer means the principal executive officer of the body corporate for the

time being, by whatever name called, and whether or not he or she is a member of the governing board of the body corporate.

 

 

 

5                                                             6 August 2003


33. A report in accordance with paragraph 32 must be based on analysis of available key financial data,      for example  asset  movements,  investment  revenue  and operating expenses.  It is not expected that this report include a comprehensive assessment or review of all assumptions and elements of the funding plan, only those that can reasonably be assessed on a quarterly basis.

 

Annual reporting

 

34. A report must be submitted to APRA on an annual basis as follows:

 

(a)  for a body corporate  that is a disclosing entity to which paragraph 319(3)(a) of the  Corporations Act 2001  applies   within  3 months afte the  end  of the financial year of the body corporate; and

 

(b) for a body corporate to which paragraph 319(3)(b) of the  Corporations Act

2001 applies (that is, a body corporate that is not a disclosing entity) within 4

months after the end of the reporting period.

 

35. The repor in  accordance  with  paragraph  34  must  be  signed  by  the  Principal Executive Officer or the Chief Financial Officer (whatever his or her official title may  be)  of  the  body  corporate  and  must  be  based  on  a detailed review and analysis of all of the key  elements of the funding plan In preparing this report, the body corporate must take into account the advice of its auditor and actuary. Any departure from the auditor’s or actuary’s advice must be disclosed.

 

Revisions to the funding plan

 

36. A body corporate should review the adequacy of its funding plan on an annual basis.  However, a funding plan may only be revised when a body corporate :

 

(a)  fails to meet a target, or targets, specified in the funding plan;

 

(b) receives advice  from its independent auditor or independent actuary that the information contained in the funding plan should be revised; and

 

(c)  seeks APRA’s prior approval on  the grounds that there are circumstances that warrant a revision to the funding plan.

 

37. A revised funding plan must not reduce the target  levels of minimum capital set out in the original funding plan without APRA’s prior approval.

 

38. Where a body corporate revises its funding plan it must lodga revised funding plan  with  APRA  within  14  days  after  the  funding  plan  has  been  revised and approved by the Board of the body corporate.  The revised funding plan must comply with all of the requirements in these guidelines and must also be certified by an independent auditor an independent actuary in the same manner as the original funding plan. 6

 

 

 

 

 

 

6 Refer to paragraph 39.

 

 

 

6                                                             6 August 2003


Certification

 

39. A  funding  plan  must  be  certified  by  an  independent  auditor  and  independent actuary. 7  Reports provided by th auditor  and  actuary  to  the  body  corporate certifying the funding plan must b lodged  by the body corporat with APRA together with the funding plan. 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7 This requirement is imposed by subparagraph 13(3)(d)(ii) of the Act.

8 The matters to be certified by the independent auditor and independent actuary are specified in guidelines made by APRA for the purposes of subparagraph 13(3)(d)(ii) of the Act: Guidelines Certification of Funding Plans by Auditors and Actuaries.  The requirements relating to the qualifications and independence of the auditor and actuary are specified in guidelines made by APRA for the purposes of subparagraph 13(3)(d)(ii) of the Act: Guidelines Qualifications and Independence of Auditors and Actuaries.

 

 

 

7                                                             6 August 2003