Following consultation the Australian Prudential Regulation Authority (APRA) has released six prudential standards and practice guides 'to strengthen governance, fitness and propriety and audit requirements for private health insurers'.
Following consultation (see: Governance News: 09/02/2018), the Australian Prudential Regulation Authority (APRA) has released six prudential standards and practice guides 'to strengthen governance, fitness and propriety and audit requirements for private health insurers'.
APRA writes that the package aims to introduce stronger prudential standards that have successfully lifted capabilities across other APRA regulated industries.
In addition, Prudential Standard HPS 350 Disclosure to APRA (HPS 350) has been revoked.
APRA writes that its expectation is that 'when fully implemented, these prudential standards and guidance will drive sound governance practices, increase focus on the competence and propriety of responsible persons and strengthen the external audit function'.
APRA Executive Board Member Geoff Summerhayes said that the 'new measures are designed to encourage timely and effective decision-making, helping insurers remain sustainable, and minimising the risk of failures that could threaten policyholders’ cover'.
The revised prudential standards come into effect on 1 July 2019. APRA states that it will consider 'further transitional arrangements' on a case by case basis and that these requests should be submitted no later than 28 February 2018. APRA states that it's expectation is that the need for these arrangements will be limited given the 'extensive consultation undertaken'.
Context: APRA states that the announcement 'is the culmination of Phase Two of APRA’s roadmap for reviewing the PHI prudential framework' and flags that phase three (capital) will commence later in the year.
According to APRA's letter to industry announcing the changes, APRA has not amended the drafting of the standards or guidance in response to feedback received during consultation. The letter identifies the concerns raised by industry and APRA's response to them. The key concerns raised were:
Guidance is not a 'mandatory prudential requirement' but APRA will consider the composition and membership of boards as part of ongoing supervision: Responding to concerns around guidance on maximum tenure limits in HPG 510, APRA states that it has 'carefully considered the submissions on this issue and confirms the guidance on director tenure is APRA’s strong expectation of sound governance practices and not a mandatory prudential requirement. Private health insurers can adopt an alternative approach in appropriate circumstances, but APRA expects the entity to be able to demonstrate that board renewal and succession planning is given sufficiently high priority'.
Director tenure: APRA goes on to note that data on the length of director tenure — 16% of non-executive directors have more than 12 years tenure, 27% exceed 10 years tenure and 6 have tenure between 20 and 31 years — 'raises the question as to whether current board renewal policies have been paid sufficient attention'. APRA will consider the composition of membership of boards as part of its ongoing supervision and engage with firms where concerns are identified.
[Sources: APRA media release 14/09/2018; APRA letter 14/09/2018; Prudential standards (effective from 1 July 2019); Prudential practice guides (effective from 1 July 2019); non confidential submissions on consultation]