Overseas investors have shown, and continue to show, a strong interest in Australian life insurers. There are further investment opportunities in this sector in Australia as banks sell their life insurance operations. .
This article outlines the key regulatory issues for foreign investors looking to establish or acquire a life insurance business in Australia.
Acquire an existing business or establish a new one?
There are a number of regulatory requirements that prospective entrants to the Australian life insurance market should be aware of.
One of the first issues that needs to be considered by a foreign investor is whether to establish its own operation in Australia as a new market entrant, or whether to instead acquire all or a part of an existing Australian life insurance company.
In summary, a market entrant that decides to establish a new life insurer can expect to be required to:
- Incorporate a local subsidiary company in Australia or, where permissible, a local branch of a foreign life insurer;
- Apply to become a registered life insurer, or registered foreign life insurer; and
- Apply for an Australian financial services (AFS) licence.
Alternatively, a market entrant looking to acquire the assets of or shares in an existing life insurer can avoid the time and expense involved in becoming a registered life insurer and obtaining an AFS licence. However, this is not necessarily an easier or faster option as the purchase must be negotiated, due diligence must be carried out, past liabilities will likely be assumed and regulatory approvals will still be required and these are set out below.
Establishing operations in Australia
Foreign investors that wish to become a new market entrant are generally required to establish a locally incorporated subsidiary in order to carry on life insurance business in Australia.
An exceptions is made for life insurers who are incorporated in New Zealand or the United States of America and who are authorised to carry on life insurance business in those countries. These life insurers are permitted to operate in Australia through a branch as an 'eligible foreign life insurance company' (EFLIC).
In order to carry on life insurance business in Australia, a foreign investor will need to make an application to the insurance regulator, the Australian Prudential Regulatory Authority (APRA), for the locally incorporated subsidiary, or EFLIC, to become a registered life insurer under the Life Insurance Act 1995 (Cth) (Life Insurance Act).
If the parent company of a locally incorporated subsidiary is a local holding company that does not itself carry on life insurance business (known as a non-operating holding company or NOHC), the NOHC may also need to be registered with APRA. If the life insurer is part of a group that includes an Australian authorised general insurer, any NOHC will be authorised and regulated under the Insurance Act 1973 (Cth).
While the timetable for the registration process depends on the complexity and completeness of the material provided by the applicant and the applicant's ability to meet APRA's requirements from day one, the process generally takes between three and 12 months to complete. APRA encourages prospective applicants to contact it as early as possible during their planning process to discuss their plans.
APRA will only authorise or register an applicant which has the capacity and commitment to conduct insurance business in Australia on a continuing basis, with integrity, prudence and professional skill. An applicant must be able to comply with the applicable prudential requirements set out in the Life Insurance Act and APRA's prudential standards, from the commencement of its insurance business and continuously thereafter.
The application involves the following steps:
a) preliminary consultation between APRA and the prospective applicant to discuss the applicant's plans to carry on insurance business in Australia;
b) submission of a draft application and relevant information, as detailed in the APRA registration guidelines, along with the applicable fee; and
c) APRA's review of the application. This will normally include meetings with senior officers and other responsible persons, as well as on-site reviews of facilities and systems proposed to be used by the applicant in carrying on its insurance business in Australia.
In relation to an application to register a life insurer, the company must appoint an actuary under the Life Insurance Act (the appointed actuary). APRA expects the proposed appointed actuary to play a major role in the application. This includes involvement in the development of the business plans, review of the terms and conditions of life insurance policies to be issued by the company, and advice on the appropriateness of the proposed reinsurance arrangements.
Examples of supporting information required for an application to APRA for registration as a life insurer include, but are not limited to:
a) ownership and board management;
b) the proposed auditors and actuaries to be appointed;
c) a three-year business plan;
d) risk and information management;
e) existing and proposed subsidiaries; and
f) an auditor's certificate.
The exact information required depends on whether the application is to register a locally incorporated company or foreign insurer.
Registration criteria for life companies
The minimum required criteria for APRA to grant registration under the Life Insurance Act include, but are not limited to:
a) governance – applicants must comply with:
i) APRA's Prudential Standard LPS 510 Governance with regard to the composition and functioning of its Board or Compliance Committee.
ii) APRA's Prudential Standard LPS 520 Fit and Proper which sets out the eligibility requirements of directors, compliance committee members and senior management.
iii) the requirement to appoint an auditor and actuary in accordance with the requirements of the Life Insurance Act to perform the duties set out in Prudential Standard LPS 310 Audit and Related Matters and LPS 320 Actuarial and Related Matters.
b) capital and assets in Australia – applicants must have in place sufficient capital to meet the minimum capital requirements under Prudential Standard PS3 Prudential Capital Requirement and Prudential Standard LPS 6.03 Management Capital Standard at all times. In addition, each statutory fund will need sufficient assets (in excess of liabilities) to meet the requirements of Prudential Standard LPS 2.04 Solvency Standard and Prudential Standard LPS 3.04 Capital Adequacy Standard at all times. APRA will assess the adequacy of start-up capital for an applicant on a case-by-case basis having regard to the size, business mix, complexity and risk profile of the business operations proposed in the business plan.
c) risk management framework – applicants must satisfy APRA that its risk management and control framework is adequate and appropriate to monitor and limit risk exposures in relation to the domestic and, where relevant, offshore operations of the life company in accordance with Prudential Standard LPS 220 Risk Management.
d) compliance – applicants must satisfy APRA that its processes and systems will ensure compliance with:
i) he Life Insurance Act and regulations;
ii) APRA's prudential standards and prudential rules;
iii) other Australian regulatory and legal requirements; and
iii) foreign regulatory requirements where applicable.
e) reinsurance management – applicants must have in place a reinsurance management framework in accordance with Prudential Standard LPS 320 Actuarial and Related Matters and Prudential Standard LPS 230 Reinsurance.
f) information and accounting systems – applicants must satisfy APRA that their information and accounting systems are adequate for maintaining up-to-date records of all business undertaken, so as to keep management continuously and accurately informed of the financial condition and the risks to which it is exposed. An applicant must demonstrate to APRA that its systems will be capable of producing all required statutory and prudential information in an accurate and timely manner from the commencement of operations, including information needed by the appointed actuary to perform their statutory functions.
g) Supervision by home supervisor – a foreign life company applicant must be an authorised life company in its home country and have received any necessary consent from its home supervisor for the establishment of the proposed life insurance business in Australia. The home supervisor will also need to confirm that the life company is of good financial standing.
In assessing applications to establish a foreign-owned subsidiary or an eligible foreign insurer, APRA will consider the level and scope of prudential supervision of the foreign owner or life company in its home country. In doing so, APRA will have regard to the Insurance Core Principles promulgated by the International Association of Insurance Supervisors.
h) Intra-group transactions and arrangements – where applicants have multiple businesses, they should have policies addressing how intra-group transactions are to be conducted.
APRA's Guidelines on Registration of Life Companies1 provides further information on the authorisation process, including the documentation to be supplied with the application and the minimum criteria for a foreign insurer and locally incorporated life insurer.
Australian financial services licence
In addition to being a registered life insurer, a life insurer will also generally be required to hold a licence to carry on a financial services business to meet the requirements of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act).2
Applications for Australian financial services (AFS) licences are made to the corporate regulator, the Australian Securities and Investments Commission (ASIC) and generally take up to four months to complete.
An applicant for an AFS licence must demonstrate that it has the capacity and expertise to comply with the obligations imposed by Australian law and that it can maintain the competence to provide the financial services covered by the AFS licence. An applicant for an AFS licence will need to prepare detailed, written "proofs" in support of their application.
Specifically, the application will need to address a number of key matters including:
a) What financial services will be provided and the authorisations required (this will depend on the types of financial services provided). The applicant will need to demonstrate that it has people with experience and qualifications in the provision of financial product advice;
b) The competence, knowledge and skills of the applicant's "responsible managers", being the people who have direct responsibility for significant day-to-day decisions about the provision of the financial services, as well as their good fame and character. We note that while the number of responsible manager's required depends on the size and complexity of a licensee's business, ASIC generally expects a prospective licensee to nominate at least two responsible managers;
c) The training and competence of the applicant's representatives and authorised representatives;
d) Compliance and risk management arrangements; and
e) The adequacy of the applicant's financial, technological and human resources. This will involve having adequate technological systems, personnel, and policies and procedures appropriate to ensure that, as an AFS licence holder, the applicant will be able to comply with its obligations under the law.
An AFS Licensing Kit is available online at ASIC's website.
Foreign ownership approvals
A foreign investor that intends to enter the market through an asset or share acquisition of an existing registered life insurer will need to consider its obligations to obtain regulatory approvals from APRA under the following legislation:
- the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA) – which regulates the acquisition of shareholdings in Australian-registered life insurers or their holding companies; and
- the Insurance Acquisitions and Takeovers Act 1991 (Cth) (IATA) – which regulates the acquisition of the assets of, or the acquisition of control by agreement over, Australian-registered life insurance companies.
The FSSA is the main regulatory process through which APRA will grant approval for the acquisition of a life insurance business in Australia by a foreign investor. IATA approval may or may not also be required.
In addition, the Australian government screens foreign investment proposals through the Foreign Investment Review Board (FIRB) and under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) to ensure they are not contrary to Australia's national interest. The Treasurer can prohibit foreign investment proposals found to be contrary to the national interest, or can impose conditions on an investment to address national interest concerns.
In general, while proposals to acquire an interest of 20% or more in any business valued at over $252 million (or the higher threshold of $1,094 million for agreement country investors from Chile, China, Japan, Korea, New Zealand and the United States) require prior FIRB approval, acquisitions of interests in life insurance companies or their holding companies are excluded from the process of FIRB approval and are dealt with instead under the FSSA application process.3
All foreign government investors require FIRB approval to acquire a direct interest in an Australian entity or business or to start a new Australian business, regardless of the value of the investment ($0 threshold).
Federal court approval for asset sales
Where a foreign investor acquires the assets of an Australian life insurer other than by way of a share sale, the acquisition process will involve a scheme confirmed by the Federal Court of Australia, exercising its jurisdiction under the Life Insurance Act to protect the interests of policyholders.
Life insurance schemes can take between 7 and 18 months to complete, depending on the nature and size of the underlying life business. While the commercial risks can be managed, a scheme creates delay and cost for the transaction process which offsets the benefit of an asset sale in allowing the purchaser to isolate and purchase selected assets.
A share acquisition avoids the need for a life insurance scheme and this is the reason why a number of recent transactions in the life insurance sector have involved share sales.4 The disadvantage of a share sale, however, is that a purchaser will generally need to acquire all of the assets and business of the life insurer. The purchaser may then need to consider any post-completion divestment of unwanted parts of the life business.
Foreign regulatory approvals
Foreign regulatory approvals may also be required where the acquirer is a life insurer in other jurisdictions. The requirements of foreign regulators should be identified and factored in to the acquisition timetable.
- Available online at: http://www.apra.gov.au/lifs/pages/registration-of-life-companies-and-non-operating-holding-companies-of-life-companies.aspx.
- Subject to certain licensing exemptions that exist.
- Section Part 3, Div 3, Sub-Div C of the Foreign Acquisitions and Takeovers Regulations 2015 (Cth).
- For example, the acquisition by Nippon Life Insurance Company of an 80% shareholding in the life insurance business of National Australia Bank, MLC, in 2016, and the acquisition by Dai-Ichi Mutual Life Insurance Company of its shareholding in Tower Australia Group Limited in 2008.