October 4, 2002 XXX. Dear XX. RE: APRA Yearly Statutory Accounts and Audit Requirements

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1 October 4, 2002 Policy, Research and Consulting Telephone: Facsimile: lyndon.kingston@apra.gov.au XXX Dear XX RE: APRA Yearly Statutory Accounts and Audit Requirements With the introduction of new Prudential Standards and statistical returns, a number of insurers and auditors have sought clarification of the audit requirements under GPS 220, specifically the requirements regarding the preparation, auditing and lodgment of the yearly statutory accounts, as defined in the Insurance Act 1973, new Prudential Standards and new Reporting Standards. Yearly Statutory Accounts In the normal course of events, insurers that are a disclosing entity (ie one to which section 111AC of the Corporations Act 2001 applies) will need to prepare, have audited and lodge their yearly statutory accounts with APRA within 3 months of the end of their financial year. Other insurers (ie non-disclosing entities not covered by section 111AC of the Corporations Act 2001) have 4 months from the end of their financial year in which to lodge their audited yearly statutory accounts. These reporting periods are consistent with the Corporations Act 2001 reporting requirements for disclosing entities and non-disclosing entities in paragraph 319(3). However, in the first year of operation, APRA has agreed to transitional arrangements, to provide insurers with longer lodgment periods. The transitional arrangements regarding the requirement to prepare, audit and lodge APRA yearly statutory accounts are outlined below: 1. Insurers with financial years ending before 30 September 2002 (ie 1 July 2002 to 29 September 2002), have the option of continuing to lodge audited APRA yearly statutory accounts under the old reporting regime, or switching to the new reporting regime Old reporting regime If an insurer elects to prepare and lodge APRA audited yearly statutory accounts under the old reporting regime, then the reporting requirements, audit requirements and lodgment requirements of the old regime are preserved for this financial year only New reporting regime If an insurer elects to prepare and lodge APRA audited yearly statutory accounts under the new reporting regime, then the reporting requirements, audit requirements and lodgment requirements of the new regime must be complied with (i.e. the Prudential Standards, Reporting Standards and the Financial Sector (Collection of Data) Act

2 2001). However, for the 2001/2002 financial year only, the lodgment deadlines are extended for an additional 3 months. This means that an insurer that is a disclosing entity has 6 months from the end of their financial year to lodge audited APRA yearly statutory accounts, and an insurer that is a non-disclosing entity has 7 months. 2. Insurers with financial years ending on 30 September 2002 are required to lodge audited APRA yearly statutory accounts under the new reporting regime. For the 2001/2002 financial year only the lodgment deadlines under the new reporting regime are extended for an additional 2 months. This means that an insurer that is a disclosing entity has 5 months from the end of its financial year to lodge audited APRA yearly statutory accounts, and an insurer that is a non-disclosing entity has 6 months. 3. Insurers with financial years ending between 1 October 2002 and 30 March 2003 inclusive are required to lodge audited APRA yearly statutory accounts under the new reporting regime, with the lodgment deadlines under the new reporting regime being extended for an additional 1 month. This means that an insurer that is a disclosing entity has 4 months after the end of its financial year to lodge audited APRA yearly statutory accounts, and an insurer that is a non-disclosing entity has 5 months. 4. Insurers with financial years ending on or after 31 March 2003 are required to lodge audited APRA yearly statutory accounts under the new reporting regime. No extension to the lodgment deadlines of the new reporting regime is available. This means that an insurer that is a disclosing entity has 3 months after its financial year end to lodge audited APRA yearly statutory accounts, and an insurer that is a non-disclosing entity has 4 months. Lodgment of yearly statutory accounts under the new reporting regime The insurer is required to submit the audited version of the yearly statutory accounts under the new reporting regime via the D2A lodgment software. In addition, the insurer is required to submit a printed version of the audited yearly statutory accounts that have been submitted electronically, along with the accompanying audit certificate from the Approved Auditor. Board declaration in relation to yearly statutory accounts While not currently a prudential requirement, APRA s intention is to require a declaration from the Board of the insurer that the insurer s yearly statutory accounts are accurate, truly present the financial performance and position of the insurer and have been prepared in accordance with the requirements of the reporting standards determined under the Financial Sector (Collection of Data) Act As the insurer is responsible for the preparation of the accounts, it is an essential element of good corporate governance that the insurer provides this declaration. Until this requirement is reflected in the Prudential Standards (Prudential Standard GPS 220 Risk Management for Insurers), we recommend insurers provide this declaration in the interim. APRA would expect that the absence of such a declaration would trigger a qualification in the audit certificate from the Approved Auditor. Prudential Audit Reporting Requirements The Prudential Standards applicable from 1 July 2002 impose more onerous prudential audit reporting requirements comparative to that required prior to 1 July As required by paragraph 24 of GGN 220.1, the Approved Auditor must audit the annual accounts of an insurer

3 as required by the Act 1 and provide a certificate to the insurer specifying whether, in the Approved Auditor s opinion: (a) (b) (c) (d) the insurer has adequate systems and procedures in place to ensure it observes all the prudential standard requirements APRA has set for the insurer; the statistical and financial data provided by the insurer to APRA in its yearly statutory accounts are reliable; the insurer has adequate systems and procedures in place to ensure it complies with statutory general insurance requirements, any conditions on the authority to carry on insurance business, and any other conditions imposed by APRA in relation to an insurer s operations; and there are any matters which will, or are likely to, adversely affect the interests of insurer s policyholders. The insurer has adequate systems and procedures in place to ensure it observes all the prudential standard requirements APRA has set for the insurer The insurer is required to have adequate risk management systems and controls in place for all Prudential Standard requirements from 1 July 2002, to which the Approved Auditor is required to positively attest. This requirement is applicable for that part of the financial year of the insurer that is post 1 July 2002 (and all subsequent financial years). Where the financial year of the insurer ends other than on 30 June 2002, the Approved Auditor will have to cater for this aspect in the sign off, by noting in the certificate the period that the systems were operating. Where the insurer is still in the process of developing or implementing adequate risk management systems at the end of its financial year, APRA expects the following: the insurer to advise the Approved Auditor of these issues; and the Approved Auditor to make sufficient disclosure of the status of these issues (including the existence of transitional arrangements agreed to by APRA) as at the end of the financial year of the insurer and the status of these issues at the time the audit certificate is signed by the Approved Auditor. APRA will also expect the insurer to detail in the Board declaration required under GPS 220 Risk management for General Insurers, the nature and extent of these limitations as at the end of its financial year and the status of these issues as at the time the Board declaration is submitted to APRA. 1 Refer section 49J of the Act.

4 The statistical and financial data provided by the insurer to APRA in its yearly statutory accounts are reliable. In relation to the auditor expressing an opinion on whether the statistical and financial data provided by the insurer to APRA in its yearly statutory accounts are reliable (point (b) above), APRA requires the auditor to attest to the following requirements: that the yearly statutory accounts prepared by the insurer are accurate, truly present the financial performance and position of the insurer and have been prepared in accordance with the requirements of the reporting standards determined under the Financial Sector (Collection of Data) Act 2001; and The insure has adequate systems supporting the preparation of the financial and statistical information. This requirement will also extend to the preparation of the quarterly reporting for subsequent financial years. The insurer has adequate systems and procedures in place to ensure it complies with statutory general insurance requirements, any conditions on the authority to carry on insurance business, and any other conditions imposed by APRA in relation to an insurer s operations. The Approved Auditor s reporting obligation in relation to point (c) of the audit opinion required by paragraph 24 of GGN 220.1, imposes a requirement to report whether relevant statutory and regulatory requirements and conditions on the insurer s license have been met, including specific bilateral requirements and conditions imposed by APRA. Reporting on compliance with relevant statutory and regulatory insurance requirements includes, but is not limited to, compliance with the following sections of the Insurance Act 1973: Determinations made by APRA under section 7, that certain sections of the Act do not apply to the general insurer; Requirement of section 10 that a body corporate must be authorised as an insurer to undertake insurance business in Australia; Any conditions imposed, varied, or revoked on the authorisation of an insurer by APRA under section 13; That the insurer holds assets in Australia (excluding assets prescribed in GPS 120) of a value equal to or greater than the total of its liabilities in Australia (unless APRA has permitted otherwise or there is a determination in force under section 7), as required by section 28 / 116A. Directions made by APRA to an insurer under sections 36, 49M, 49N, 49Q, 51 and 62. There are any matters which will or are likely to, adversely affect the interests of insurer s policyholders. The Approved Auditor s reporting obligation in relation to point (d) of the audit opinion required by paragraph 24 of GGN 220.1, is to report to APRA matters that in the Approved Auditor s opinion may have potential to affect or materially prejudice the interests of policyholders. APRA does not expect the Approved Auditor to expand the scope of the engagement to specifically meet this reporting requirement, or for the Approved Auditor of a

5 foreign branch insurer to be aware of all material issues or events that are outside the Australian branch operations. Rather this reporting requirement is based on the information gained during the course of the audit, additional work undertaken for APRA reporting purposes and current knowledge of the insurer s affairs. Format of Audit Certificate Examples of the format of the audit certificate that will be required under paragraph 24 of GGN will be contained in an audit guidance statement that is being developed by the Auditing and Assurance Standards Board of the Australian Accounting Research Foundation in consultation with APRA. We hope this document will be finalised and available for the industry and Approved Auditors shortly. Listing of Reporting Forms The APRA reporting forms to be lodged on a quarterly basis are outlined in Attachment A. The APRA reporting forms to be lodged on annual basis are outlined in Attachment B. The APRA reporting forms that comprise the yearly statutory accounts are outlined in Attachment C. If you have any questions please contact Lyndon Kingston on or by lyndon.kingston@apra.gov.au Yours sincerely Lyndon Kingston Senior Accounting Specialist Policy Development

6 Attachment A: Reporting Forms to be Lodged on a Quarterly Basis Form Name GRF 110.0: Minimum Capital Requirement GRF 120.0: Determination of Capital Base (not applicable for Branch Insurers) GRF 130.0: Off Balance Sheet business Credit substitutes and risk charge GRF 130.1: Off Balance Sheet Business Liquidity support facilities obtained GRF 130.2: Off Balance Sheet business Charges granted and risk charge GRF 130.3: Off Balance Sheet business Credit support received GRF 140.0: Investments Direct Interest Rate Holdings and Risk Charge GRF 140.1: Investments - Direct Equity Holdings and Risk Charge GRF 140.2: Investments Direct Property Holding and Risk Charge GRF 140.3: Investments Loans and Advances and Risk Charge GRF Investments Assets Indirectly Held by Insurer and Risk Charge GRF 150.0: Asset Concentration and Risk Charge GRF 160.0: Derivative Activity and Risk Charge GRF 170.0: Maximum Event Retention GRF 210.0: Outstanding Claims Provision Insurance Risk Charge GRF 210.1: Premium Liabilities Insurance Risk Charge GRF 300.0: Statement of Financial Position Inside Australia GRF 300.0: Statement of Financial Position Total Operations GRF 310.0: Statement of Financial Performance GRF 310.1: Premium Revenue and Reinsurance Expense GRF 310.2: Claims Expense and Reinsurance Recoveries GRF 310.3: Investment and Operating Income and Expense NOTE: GRF 120.0: Determination of Capital Base is not applicable for Branch Insurers. These forms are required to be lodged 20 business days after the end of the financial year of the insurer. However transitional arrangements will be in place for the first 2 quarters. The lodgment dates for these quarters will be advised at a later date.

7 Attachment B: Reporting Forms to be Lodged on an Annual Basis Form Name GRF 400.0: Statement of Risk by Country GRF 410.0: Movement in Outstanding Claims Provision GRF 420.0: Premium Revenue by State and Territory of Australia GRF 430.0: Claims Expense by State and Territory of Australia GRF 440.0: Claims Development Table GRF 450.0: Interest in Controlled Entities and Joint Ventures NOTE: These forms must be lodged at the same time as the insurer lodges its Yearly Statutory Accounts (these forms do not form part of the Yearly Statutory Accounts and are not required to be audited).

8 Attachment C: Reporting Forms Comprising the APRA Yearly Statutory Accounts Form Name GRF 110.0: Minimum Capital Requirement GRF 120.0: Determination of Capital Base (not applicable for Branch Insurers) GRF 130.0: Off Balance Sheet business Credit substitutes and risk charge GRF 130.1: Off Balance Sheet Business Liquidity support facilities obtained GRF 130.2: Off Balance Sheet business Charges granted and risk charge GRF 130.3: Off Balance Sheet business Credit support received GRF 140.0: Investments Direct Interest Rate Holdings and Risk Charge GRF 140.1: Investments - Direct Equity Holdings and Risk Charge GRF 140.2: Investments Direct Property Holding and Risk Charge GRF 140.3: Investments Loans and Advances and Risk Charge GRF Investments Assets Indirectly Held by Insurer and Risk Charge GRF 150.0: Asset Concentration and Risk Charge GRF 160.0: Derivative Activity and Risk Charge GRF 170.0: Maximum Event Retention GRF 210.0: Outstanding Claims Provision Insurance Risk Charge GRF 210.1: Premium Liabilities Insurance Risk Charge GRF 300.0: Statement of Financial Position Inside Australia GRF 300.0: Statement of Financial Position Total Operations GRF 310.0: Statement of Financial Performance GRF 310.1: Premium Revenue and Reinsurance Expense GRF 310.2: Claims Expense and Reinsurance Recoveries GRF 310.3: Investment and Operating Income and Expense GRF 320.0: Reconciliation of Annual Disclosure NOTE: GRF 120.0: Determination of Capital Base is not applicable for Branch Insurers. The lodgment requirements and the transitional arrangements for the APRA audited Yearly Statutory Accounts are outlined in the covering letter above.