House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 6 - Other obligations of private health insurers

Outline of chapter

6.1 Part 5 to the Prudential Supervision Bill governs the additional obligations of private health insurers, including requirements relating to actuaries and disqualifications. Part 5 provides for:

•

the requirement to appoint an actuary and process for appointing and terminating the appointment of an actuary;

•

the powers and obligations of actuaries;

•

the prohibition on employing disqualified persons as officers and actuaries;

•

the automatic disqualification of certain persons from being an officer or actuary;

•

the Federal Court's power to disqualify and revoke or vary a disqualification;

•

how a disqualification proceeding interacts with the privilege against self-incrimination;

•

restrictions on insurers paying penalties on behalf of officers; and

•

giving reports and details about officers APRA.

6.2 Unless otherwise stated, all references in this Chapter relate to the Prudential Supervision Bill.

Summary of new law

6.3 Part 5 largely replicates existing Part 4-5 of the PHI Act, but amends the provisions to align the language around powers and obligations of actuaries with the Life Insurance Act. This Part requires insurers to appoint certain persons as actuaries and governs the powers and obligations of actuaries. These include provisions around appointing and removing actuaries, the actuary's role, their reporting obligations, and their qualified privilege. Separately, the Part prohibits the appointment of disqualified persons and governs which persons are disqualified, and the removal of the privilege against self-incrimination during disqualification proceedings.

6.4 The Part also replicates provisions around restricting payment of penalties on behalf of officers of the insurer, to ensure that officers are duly penalised if they commit an offence. The Part also includes the insurer's requirement to give copies of reports to APRA, and to notify APRA of the name and contact details of the insurer's officers.

Comparison of key features of new law and current law

Detailed explanation of new law

Division 1 - Introduction

Simplified outline of this Part

6.5 The obligations of a private health insurer include requirements to have an appointed actuary, to not allow disqualified persons to act as officers or actuaries, and to not use the insurer's money to meet certain liabilities of officers. The appointed actuary of a private health insurer also has obligations, including requirements to draw certain matters to the attention of the insurer's directors, and to provide information to APRA. [Part, 5 Division 2, section 105)]

Appointment

6.6 An insurer must appoint an actuary. If an actuary ceases to work for the insurer, the insurer must appoint another actuary within six weeks. This requirement ensures that the insurer has an actuary to carry out an actuary's statutory functions and duties in relation to the insurer [Part 5, Division 2, subsections 106(1) and (2)]

6.7 A private health insurer can only appoint an actuary that the insurer is satisfied meets the eligibility criteria, which are set out in APRA's prudential standards. This requirement ensures the actuary is appropriately qualified and fit for appointment. [Part 5, Division 2, subsection 106(3)]

6.8 A private health insurer must not appoint an actuary who is disqualified. This protects the insurer from an actuary who is not fit or proper. [Part 5, Division 2, subsection 106(4)]

6.9 If there is already an appointed actuary another actuary cannot be appointed. [Part 5, Division 2, subsection 106(5)]

Ending an appointment as actuary

6.10 A private health insurer must end a person's appointment as actuary if:

•

the person does not meet the eligibility criteria in the prudential standards; or

•

the person is subject to a disqualification order under section 119; or

•

the insurer reasonably believes that the person has failed to adequately and properly perform their statutory functions and duties under the Prudential Supervision Bill. [Part 5, Division 2, subsection 107(1)]

6.11 The test for whether an insurer has failed to adequately perform their duties has both subjective and objective elements. That is, the insurer must subjectively believe that the actuary has failed to perform their duties, but this belief must be objectively reasonable. The intention here is to prevent a situation where an insurer is being badly managed, and the actuary brings that bad management to the insurer's attention, and the insurer responds by forming an unreasonable view that the actuary has failed to perform their duties adequately and properly.

Example 6.1

Laura is the appointed actuary of an insurer, TIM Health Co. a private health insurer. Laura identifies a large and significant exposure relating to a health benefits fund of the insurer. She informs APRA that, in her assessment, this has caused TIM Health Co. to breach the Prudential Supervision Bill. The directors of TIM Health Co. are displeased that Laura has informed APRA of the breach and decide to terminate Laura's appointment as actuary. They form the view that Laura has failed to perform adequately her statutory functions and duties; however this is not a reasonable view. Therefore, TIM Health Co. cannot use section 107 to terminate Laura's appointment.

6.12 An actuary's statutory functions and duties include obligations under the Prudential Supervision Bill, the PHI Act and the FS(CoD) Act, including any relevant regulations, prudential standards and rules under that Bill or those Acts. [Part 5, Division 2, subsection 107(2)]

6.13 The Prudential Supervision Bill allows directors of an insurer to temporarily appoint another actuary even where the appointment is not in accordance with the insurer's constitution or the insurer's rules (this is where the power to appoint is not vested in the directors or the directors alone), where an insurer has terminated an actuary under subsection 107(1). The appointment must still be consistent with subsection 106(3), which requires the appointment to meet the eligibility criteria in the prudential standards. This power ensures that the insurer can temporarily appoint an actuary pending an appointment in accordance with the insurer's constitution or business rules. [Part 5, Division 2, subsection 107(3)]

Notification of appointment etc.

6.14 An insurer that appoints an actuary must, within 14 days, provide APRA with certain details about the appointed actuary and their appointment. This requirement assists APRA to ensure the actuary is duly qualified and allows APRA to regulate the actuary's conduct. [Part 5, Division 2, subsections 108(1) and (2)]

6.15 If an actuary's appointment ends, the insurer has 14 days to notify APRA in writing that the actuary's appointment has ceased. This requirement ensures APRA's records of actuaries are up-to-date for the purpose of regulating actuaries and their appointment. [Part 5, Division 2, subsection 108(3) and (4)]

Role of appointed actuary

6.16 An appointed actuary must perform the statutory functions and duties set out in the prudential standards (some of which apply directly to appointed actuaries). This ensures that the actuary fulfils the regulator's requirements, and that (amongst other things) the insurer appropriately provisions for claims. [Part 5, Division 2, subsection 109(1)]

6.17 The private health insurer must enable the appointed actuary to perform their functions, including by providing actuaries with documents, requiring officers and employees to answer questions and allowing actuaries to attend and speak at meetings. The requirement is to ensure that an actuary is capable of performing their role. [Part 5, Division 2, subsection 109(2)]

Actuary's obligation to report

6.18 If the actuary considers that action must be taken to avoid contravention of the Prudential Supervision Bill, the PHI Act or the FS(CoD) Act, the actuary must bring this to the attention of the insurer, the directors or an officer of the insurer. The intention here is to assist insurers to avoid contraventions of the law. [Part 5, Division 2, paragraph 110(1)(a)]

6.19 If an actuary considers that action must be taken to avoid prejudicing the interests of policy holders of a health benefits fund, the actuary must bring this to the attention of the insurer or the directors of an insurer. In this context 'the interests of policy holders' means their interest in the insurer being prudentially sound, including being able to pay out future claims (rather than, for example, the interest that a policy holder might have as a consumer in having a lower premium or different policy terms). [Part 5, Division 2, paragraph 110(1)(b)].

Example 6.2

Ryan is the appointed actuary of EA Health Insurance Co (EA), a private health insurer. He has an obligation to report any matter to EA or its directors that Ryan considers would prejudice the interests of the policy holders. Ryan notices that EA is about to enter into a financial transaction that may risk EA's ability to pay out policy holders in the future. Ryan must report his concern to the director of EA or EA itself (this might be by reporting to an officer of EA whose position and role means that he or she has authority to receive the report and take the matter further within EA).

Example 6.3

Shane is the appointed actuary of IM Health, a private health insurer. Shane is aware that the directors of IM Health wish to raise the premiums that policy holders pay. Shane does not need to report the risk of a rise in premiums to IM Health or an officer, as in a rise in premiums does not 'prejudice the interest of policy holders' in the relevant sense.

6.20 If an actuary considers the insurer or an officer of the insurer may have contravened the Prudential Supervision Bill or other law and that the contravention is of such a nature that it may significantly affect policy holders' interests, the actuary must notify APRA. The intention is to warn APRA so that APRA can intervene to prevent a situation where insurers are not able to fulfil their financial promises to policy holders. [Part 5, Division 2, paragraphs 110(2)(a) and (b)]

6.21 The notification must be in writing and inform APRA of the actuary's opinion and the information on which the opinion is based. [Part 5, Division 2, paragraphs 110(2)(c) and (d)]

6.22 However, an actuary does not have an obligation to notify APRA if an officer of the insurer has informed the actuary that the insurer has already notified APRA in writing and the actuary has no reason to disbelieve the officer. [Part 5, Division 2, subsection 110(3)]

6.23 It is an offence for an officer of the private health insurer to deceive an actuary and tell an actuary that the APRA is informed about a contravention if APRA has not been informed. For an offence to occur the officer must know that there are reasonable grounds for believing that the insurer has contravened the Prudential Supervision Bill or another law, and the contravention is of such a nature that it may significantly affect the interests of policy holders. The maximum penalty for this offence is 60 penalty units or 12 months imprisonment or both. This penalty is appropriate given the offence involves deliberate deception which could significantly risk the interests of policy holders. The severity of the penalty is analogous to the offences with the same penalty in the Attorney-General's Department's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers such as making false statements in notices. [Part 5, Division 2, subsection 110(4)]

6.24 If an actuary has drawn a matter to the insurer's attention, and the actuary is satisfied that the insurer has had reasonable time to take action but has failed to take action, the actuary must inform APRA about the matter in writing. [Part 5, Division 2, subsection 110(5)]

6.25 An actuary is still subject to an obligation to inform APRA as above even if the actuary's appointment ceases before the actuary has informed APRA. [Part 5, Division 2, subsection 110(6)]

Appointed actuary may give information to APRA

6.26 A current or former actuary may give information, books, accounts or documents about the private health insurer to APRA if the actuary considers this will assist APRA in performing it functions under the Prudential Supervision Bill, the FS(CoD) Act or the PHI Act. If an actuary does this in good faith and without negligence, the actuary is not liable for any claim or demand in respect of the information or document. This provision ensures that actuaries do not refrain from giving APRA useful information for fear of liability, for example in defamation. [Part 5, Division 2, section 111]

Duty of appointed actuary to give information when required

6.27 APRA may give written notice to a current or former actuary requiring the actuary to give APRA information, books, accounts or documents relating to the insurer, if APRA considers it will assist in performing APRA's functions under the Prudential Supervision Bill or the FS(CoD) Act. The actuary has seven days or a reasonable period (whichever is greater) to comply with APRA's notice [Part 5, Division 2, subsection 112(1) and (2)]

Example 6.4

APRA requests large amount of documents from a former actuary, Simon. Simon reasonably requires 14 days to respond to APRA's request. Therefore Simon will have 14 days to respond.

6.28 Failure to comply with a notice under subsection 112(1) is an offence, with a maximum penalty of 30 penalty units. However, to commit the offence the actuary or former actuary must be capable of complying with the notice. [Part 5, Division 2, subsections 112 (3) and (4)]

6.29 An actuary or former actuary must comply with a notice to give information even if that information may incriminate them. However, the information given in accordance with the notice is not admissible in proceedings against the actuary or former actuary, except in a proceeding for 137.1 and 137.2 of the Criminal Code (providing false or misleading information or documents). That is, whilst an actuary cannot claim privilege against self-incrimination in order to avoid complying with the notice, the information provided in response to the notice cannot be used in criminal proceedings or proceedings for a penalty (other than disqualification). This ensures that APRA receives information which it can use to protect the interests of policy holders and prudentially regulate. However if an actuary/former actuary deliberately attempts to deceive APRA by placing misleading or false information in the notice, then the notice can still be used to prosecute the actuary/former actuary. [Part 5, Division 2, subsections 112(2), (3) and (4)]

6.30 This provision provides 'use immunity' but not 'derivative use immunity', that is, immunity in relation to anything obtained as a direct or indirect consequence of the production of the information, document or thing. In this respect the provision is consistent with self-incrimination provisions in the other legislation administered by APRA, including 156F of the Life Insurance Act. A difficulty with derivative use immunity is that it means that further evidence obtained through a chain of inquiry resulting from the protected evidence cannot be used in relevant proceedings even if the additional evidence would have been uncovered by the regulator through independent investigation processes. A related issue is that it can be very difficult and time-consuming in a complex investigation to prove whether evidence was obtained as a consequence of the protected evidence or obtained independently. [Part 5, Division 2, subsections 112(2), (3) and (4)]

Qualified privilege of appointed actuary

6.31 A current or former actuary of an insurer has a qualified privilege in relation to any statement made for the purposes of their statutory functions and duties. That is, the actuary will have a defence in defamation proceedings in relation to a communication made in relation to their statutory functions or duties. [Part 5, Division 2, sections 113]

Referring matters to professional associations for actuaries

6.32 APRA may refer a matter to an actuary's professional association for consideration of disciplinary or other action if APRA considers that the actuary failed to adequately perform their duties or functions or is not a fit and proper person to be an actuary. This is another mechanism for APRA to ensure an actuary fulfils their statutory requirements, which is important given the actuary's unique role in overseeing the insurer. [Part 5, Division 2, subsection 114(1)]

6.33 If APRA refers such a matter, APRA must also give written notice of this to the actuary. [Part 5, Division 2, subsection 114(2)]

APRA may direct removal of actuary

6.34 If an actuary is disqualified, is not a fit and proper person to be an appointed actuary or has failed to adequately perform their duties or functions under the Prudential Supervision Bill or the PHI Act, APRA may give a written direction to the private health insurer to end the person's appointment as actuary. [Part 5, Division 2, subsection 115(1) and (2)]

6.35 Before making such a direction, APRA must give a written notice to the insurer and the actuary and give the actuary and the insurer a reasonable opportunity to make submissions. The notice must include a statement that APRA may discuss any submission with other persons that APRA considers appropriate. [Part 5, Division 2, subsections 115(3) and (4)]

6.36 If a submission is made, APRA must consider the submission and may discuss it with any persons APRA considers appropriate. [Part 5, Division 2, subsection 115(5)]

6.37 A direction ending an actuary's appointment takes effect on the day the direction specifies, which must be at least seven days after the direction is made. APRA must give both the insurer and the actuary a copy of the direction. [Part 5, Division 2, subsections 114(6) and (7)]

6.38 It is an offence with a penalty of 30 penalty units for a private health insurer to fail to comply with a direction given under section 115. [Part 5, Division 2, subsection 115(8)]

Division 3 - Disqualified persons

6.39 The Prudential Supervision Bill allows the Federal Court to disqualify an officer or appointed actuary of an insurer, on application by APRA. By contrast, the PHI Act gives the Council an administrative power to make a determination that a person is disqualified. The disqualification regime in the Prudential Supervision Bill therefore differs by requiring APRA to approach a court for a determination that a person is disqualified. This approach gives officers and actuaries the benefit of having a disqualification order made by an independent judicial body. As with the PHI Act, the Prudential Supervision Bill stipulates grounds upon which a person is automatically disqualified, although the Prudential Supervision Bill allows APRA or a disqualified person to approach the court and seek a declaration that the person should not be treated as disqualified.

Private health insurers not to allow disqualified persons to act as directors

6.40 An insurer commits an offence if the insurer allows a disqualified person to act as an officer or appointed actuary. The offence carries a maximum penalty of 12 months imprisonment or 60 penalty units or both. The penalty is set so that an insurer does not knowingly or recklessly appoint someone who could risk the insurer's solvency and the interests of policy holders. [Part 5, Division 3, subsection 116(1)]

6.41 An insurer does not commit an offence if APRA has told the insurer that the disqualified person is not disqualified. [Part 5, Division 3, subsection 116(2)]

Disqualified persons must not act for private health insurers

6.42 A disqualified person commits an offence, with a penalty of 12 months imprisonment or 60 penalty units or both, if they act as an appointed actuary or officer of a private health insurer. This penalty reflects the penalty for the equivalent offence in section 116. [Part 5, Division 3, section 117]

Effect of non-compliance

6.43 The transactions and appointment of disqualified persons not invalid because of the disqualification. [Part 5, Division 3, section 118]

Who is a disqualified person?

6.44 A person is a disqualified person if:

•

the person has been convicted of an offence against or arising out of the Prudential Supervision Bill, the FS(CoD) Act, the PHI Act, the Corporations Act or former Corporations Law, or to the corporations law of a foreign country; or

•

the person has been convicted of an offence under Australian law, or any corresponding law of a foreign country, and the offence involves dishonest conduct or an offence relating to a financial sector company, a private health insurer or a superannuation entity; or

•

the person has been or becomes bankrupt, applies for relief under a bankruptcy law or 'compounds' (enters into a multi-party agreement in order to settle) with all of their creditors; or

•

the person has been disqualified by the Federal Court under section 120. [Part 5, Division 3, subsection 119(1)]

6.45 The policy intent is that dishonest persons, persons who have been bankrupt and persons who breach corporations law are not appropriate persons to occupy the position of an officer or be actuaries.

6.46 A disqualified person includes a person who has been relieved of a conviction due to section 19B of the Crimes Act or the corresponding law of a foreign country. Section 19B of the Crimes Act allows a court to discharge a person charged with a federal offence without proceeding to a conviction where the charge is proved but the court considers it is inexpedient to inflict punishment by reason of the nature of the offence or extenuating circumstances. [Part 5, Division 3, subsection 119(2)]

6.47 The Prudential Supervision Bill does not affect the operation of Part VIIC of the Crimes Act relating to spent convictions. [Part 5, Division 3, subsection 119(3)]

Court power of disqualification

6.48 Upon APRA's application, the Federal Court may disqualify a person from being an officer or appointed actuary of an insurer, if the Court is satisfied that the person is both not a fit and proper person and the disqualification is justified. [Part 5, Division 3, subsection 120(1)

6.49 The disqualification can be for all private health insurers, or a particular private health insurer, or a particular class of insurer. [Part 5, Division 3, subsection 120 (2)]

6.50 Prudential standards may set out criteria for whether a person is fit and proper, which the Court may take into account, along with any other matters in the prudential standards or any other matter the Court considers relevant. [Part 5, Division 3, subsection 120(3)]

6.51 In deciding whether the disqualification is justified, the Federal Court may consider:

•

if the application relates to an officer - the person's conduct in the management, business or property of any corporation;

•

if the application relates to an actuary - the person's conduct in relation to their functions or duties under the Prudential Supervision Bill, the PHI Act, FS(CoD) Act, the Insurance Act 1973, the Life Insurance Act or the Superannuation Industry (Supervision) Act 1993 (SIS Act); and

•

any other matter the court considers relevant. [Part 5, Division 3, subsection 120(4)]

6.52 After the Federal Court disqualifies a person under section 120, APRA must give details of the disqualification to the private health insurer the disqualified person is working for and publish details of the disqualification in the Gazette. [Part 5, Division 3, subsection 120(5)]

Court power to revoke or vary a disqualification etc.

6.53 Either the disqualified person, or APRA, can apply to the Federal Court to vary or revoke a disqualification order or be deemed not to be a disqualified person. APRA and the disqualified person must inform the other if either makes such an application. The Court can put conditions and exceptions on an order deeming a person not disqualified. [Part 5, Division 3, section 121]

Privilege against exposure to penalty - disqualification under section 120

6.54 The Prudential Supervision Bill specifies a person cannot refuse to give evidence in proceedings arising under the Prudential Supervision Bill or refuse to do something that is a requirement under the Prudential Supervision Bill on the grounds that doing so would lead to a disqualification order being made against the person. This means that a person does not receive the benefit of 'use immunity' in subsections 112(6) and 149(2) in relation to a disqualification order. Accordingly, the evidence given may be used in disqualification proceedings. This is reasonable because a disqualification order is not a criminal penalty, and is it important to ensure that the policy holders' interests are not risked by an insurer employing an inappropriate officer or actuary. An insurer must not reimburse such an officer in relation to such an amount. [Part 5, Division 3, subsections 122]

Restrictions on payment of pecuniary penalties etc.

6.55 The Prudential Supervision Bill prohibits insurers from paying out pecuniary penalties for criminal offences or other liabilities under the Prudential Supervision Bill for which an officer is personally liable. This ensures that officers have financial incentives to avoid contravening the law or causing harm to policy holders. [Part 5, Division 4, section 123]

Giving APRA copies of reports made to policy holders

6.56 APRA rules may require insurers to give to APRA the reports it provides to policy holders. This enables APRA to receive more information which assists APRA to prudentially regulate. Reports under this section will be consistent with Rule 5 of the Private Health Insurance (Insurer Obligations) Rules 2009, made under section 169-1 of the PHI Act. [Part 5, Division 4, section 124]

Notifying APRA of name and contact details of officers

6.57 APRA may also require a private health insurer to give the names and contact details of its officers to APRA. This requirement may assist APRA to prudentially regulate insurers. [Part 5, Division 4, section 125]