Insurer Securities Policy Framework

1. Purpose

The Insurer Securities Policy Framework (the framework) sets out the decision-making approach that the State Insurance Regulatory Authority (SIRA) takes to determine whether to hold insurer securities within the current and any future statutory insurance schemes it regulates.

The framework is not intended to be a step-by-step guide or checklist for the decision-making process, but rather is intended to document the broader policy and non-scheme specific considerations that SIRA may take into account when reaching a decision. The framework does not inform decisions about individual insurers or the determination of an insurer’s specific securities requirements.

Further, the framework does not influence the operational process (communications, consultation, approvals and appeals processes) for individual scheme decisions in security matters.

The framework aims to:

• Tailor and ensure consistent decision-making considerations to the unique needs and characteristics of each scheme, avoiding a one-size-fits-all approach.
• Be scheme-agnostic so that it transcends scheme-specific differences, while maintaining adaptability to individual scheme requirements.
• Embrace a risk-based approach that aligns decisions with the specific market structures, insurance providers and risks within each scheme.
• Remain flexible and adaptable to new or evolving schemes to ensure sustained relevance and applicability.

There is a distinction to be made between determining whether to hold insurer securities for a scheme and determining an insurer’s specific security requirements, such as the value of securities to be held and manner in which these will be held. This framework pertains to the first issue only – whether SIRA should hold securities for the insurers in a scheme (not specific to individual insurers).

The decision regarding whether to hold securities precedes any specific security determinations for insurers, that is, specific security determinations and requirements are only determined after a position has been established regarding whether SIRA will hold securities for insurers in a scheme.

2. Introduction

SIRA was established under Part 3 of the State Insurance and Care Governance Act 2015 (SICG Act).

SIRA is the government organisation responsible for regulating and administering the workers compensation, motor crash compulsory third party (CTP) and home building compensation (HBC) schemes in New South Wales (NSW).

Under the SICG Act, the principal objectives of SIRA are:

• to promote the efficiency and viability of the insurance and compensation schemes
• to minimise the cost to the community of workplace injuries and injuries arising from motor crashes and to minimise the risks associated with such injuries
• to promote workplace injury prevention, effective injury management and return to work measures and programs
• to ensure that people injured in the workplace or in motor crashes have access to treatment that will assist with their recovery
• to provide for the effective supervision of claims handling and dispute
• to promote compliance with the relevant legislation
• to collect and analyse information on prudential matters in relation to insurers
• to encourage and promote the carrying out of sound prudential practices by insurers
• to evaluate the effectiveness and carrying out of those practices.

2.1. Legislative framework

The primary schemes that SIRA regulates are established and governed by the following legislative instruments and regulations:

• Compulsory Third Party Scheme
  • Motor Accidents Act 1988
  • Motor Accidents Compensation Act 1999
  • Motor Accident Injuries Act 2017
  • Regulations and instruments made under those Acts
• Workers Compensation Scheme
  • Workers Compensation Act 1987
  • Workplace Injury Management and Workers Compensation Act 1998
  • Regulations and instruments made under those Acts
• Home Building Compensation Scheme
  • Home Building Act 1989

SIRA additionally exercises regulatory responsibilities in other insurance schemes within NSW, such as the Lifetime Care and Support, Volunteers, Dust Diseases and Sporting Injuries Compensation Schemes.¹

3. Background

Financial viability of insurers is essential to the ongoing sustainability of the schemes that these insurers operate within. SIRA adopts differing approaches across the schemes it regulates to ensure that insurers maintain sufficient financial viability and resources to meet their liabilities.

3.1. CTP Scheme

To operate as a licensed insurer within the CTP Scheme, an insurer must be authorised under the Insurance Act 1973 (Cth) to carry on insurance business. For CTP insurers, this means they are subject to regulation by the Australian Prudential Regulatory Authority (APRA) and must adhere to APRA’s capital adequacy framework which requires an insurer to maintain adequate capital against the risks associated with its activities.

Under the Motor Accidents Injuries Act 2017 (the MAI Act), there are no legislative provisions that require or enable SIRA to hold insurer securities.

3.2. HBC Scheme

Within the HBC Scheme, SIRA has legislative capacity to hold insurer securities under section 105I(c) of the Home Building Act 1989 (the HBC Act).

SIRA is yet to invoke this legislative power as there are currently no private licensed insurers operating in the HBC Scheme. While the current sole provider in the HBC Scheme, icare HBCF, is not APRA-regulated, SIRA has presently deemed that it meets APRA’s minimum capital requirements.

3.3. Workers Compensation Scheme

In the Workers Compensation Scheme, self-insurers (except for government self-insurers)² and specialised insurers are required to provide financial security to SIRA under the Workers Compensation Act 1987 (the Workers Compensation Act) and in accordance with their licence conditions.³

Such requirements are imposed by SIRA to adequately provide for all the accrued, continuing, future and contingent liabilities of the insurer and to ensure that other employers in the state will not be required to meet the cost of claims if these insurers are not able to meet their workers compensation liabilities.

4. Application of the framework

Unless otherwise indicated to the contrary, the framework applies to all statutory insurance schemes regulated by SIRA.

The framework should be read alongside any policies, regulations, and legislation related to the holding of insurer securities, and existing scheme-specific frameworks, where applicable.

4.1. SIRA’s decision-making

In accordance with the Regulatory Framework, SIRA’s regulatory decisions are made in the context of applicable laws and the principles of administrative law.

The Insurer securities policy framework does not set out a comprehensive guide or checklist on how a decision-maker is to meet the administrative law principles as that may inappropriately narrow the focus of the decision-maker.

The provision of any guidance for administrative law and internal review principles may be considered as part of a larger program of work in relation to SIRA’s broader decisions and decision-making powers.

5. Insurer securities framework

The framework outlines SIRA’s decision-making considerations when determining the requirement or suitability to hold insurer securities within a given scheme.

It follows a systematic approach which incorporates an assessment of the legislative requirement and authority, risks, and evaluation of existing safeguards.

5.1. Overview: Decision to hold securities

SIRA must comply with any existing legislative provisions that impose a requirement to hold insurer securities.

Outside of legislative requirements, SIRA will consider whether there are any legislative provisions that authorise SIRA to request securities from insurers and additionally whether SIRA has imposed any requirements in accordance with the legislative authority.

Where there is not an established legislative requirement or authority to do so, the decision to hold securities involves determining SIRA's risk appetite in light of the risks present and available safeguards. This will involve conducting a detailed risk assessment tailored to scheme-specific factors, and critically evaluating existing risk mitigation measures and safeguards. This practical application ensures that SIRA’s decision-making is not only strategic but also contextually relevant to the challenges and intricacies inherent in each insurance scheme under SIRA's regulatory oversight.

SIRA’s risk appetite

A fundamental consideration is SIRA’s risk appetite within the scheme as this will inform SIRA’s decision on whether to hold securities. This question encapsulates SIRA’s strategic intent and commitment to ensuring the stability and financial soundness of the insurance schemes under its regulatory purview.

Risk assessment

SIRA's decision to hold securities involves an assessment of the level of risk present in the respective insurance scheme. Through this assessment SIRA conducts an analysis of insurance risks, scheme risks, and any organisational risks, outlined in Section 5.4 of this framework. This may involve evaluating the unique characteristics, market structures, and vulnerabilities within the relevant scheme.

The aim is to identify situations where holding insurer securities would be a judicious risk mitigation strategy.

Consideration of safeguards

As a part of the risk assessment, decision-makers will consider existing risk mitigation measures and available safeguards within the regulatory landscape.

SIRA will assess the adequacy of available mechanisms, both internal and external, such as APRA's capital adequacy framework and guarantee funds, in addressing insurer liabilities. This practical assessment helps determine the need for supplementary measures, including the potential decision to hold insurer securities.

This involves an examination of current safeguards and their adequacy in reinforcing the financial resilience of the schemes. It serves as a practical step in ensuring the robustness of the regulatory approach within the context of each insurance scheme.

5.2. Legislative requirement to hold securities

SIRA will refer to the relevant scheme’s enabling legislation to determine if there are any legislative provisions requiring the holding of insurer securities.

SIRA must adhere to any legislative requirements relating to the holding of securities.

5.2.1. Established procedures

SIRA will consider if there is an established procedure for holding securities.

An established procedure may include an external legislative or regulatory framework, or internal SIRA policies which govern the manner in which securities are to be held. For example, the Security deposits for self and specialised insurers policy in the Workers Compensation Scheme sets out the types of insurer security that will be accepted by SIRA and the terms under which they will be accepted.

Where an established procedure exists, SIRA will hold securities in accordance with such requirements. SIRA may consider a review and update of established procedures where appropriate, including to ensure it is satisfied with the sufficiency, consistency, and reliability of the procedure.

Where a legislative requirement to hold securities is not supplemented by an established procedure, SIRA may consider developing an appropriate procedure to govern the holding of insurer securities.

5.3. Legislative authority to hold securities

5.3.1. Legislative authority

Where there is no legislative requirement to hold securities, SIRA will refer to the relevant enabling legislation of a scheme to determine if there is statutory provision authorising SIRA to hold insurer securities.

The legislative power to hold securities may be set out as a matter that SIRA may regulate by conditions of licences.⁴ SIRA will consider any relevant licensing frameworks and licence conditions requiring securities in accordance with the legislative power. For example, SIRA’s ‘Licensing framework for specialised insurers’ in the Workers Compensation Scheme.

5.4. Risks

SIRA will take a risk-based approach when making decisions regarding the holding of insurer securities.

Comprehensive risk assessment will enable SIRA to identify potential risks and/or issues that may affect the insurers’ financial viability and ongoing capacity to meet their liabilities and obligations. Risk identification will allow SIRA to assess the present level of risk against SIRA’s acceptable level of risk. This assessment, along with whether there are other risk mitigation strategies in place, will ultimately inform SIRA’s decision to hold, or not hold, insurer securities.

SIRA’s regulatory risk and governance approach uses a systematic risk management process to identify, analyse, evaluate and treat risks, to the schemes individually, collectively, as well as to the scheme users (people with a claim and policyholders) based on robust practices detailed in the AS ISO 31000:2018 Risk Management - Guidelines.

5.4.1. Insurance risks

SIRA must consider any risks that may impact the insurers’ financial viability or capacity to meet their insurance liabilities.

An assessment of insurance risk may involve a consideration of factors including underwriting, claims management, product design, and pricing. These risks considered exclusively may not be sufficient and its relevance will be subject to scheme-specific factors. SIRA will also take into account how the identified risks interact with the design of a scheme and the scheme’s risk profile (see ‘Additional considerations’ at the end of section 5.4.1).

SIRA will also consider insurance risk in the wider context of potential consequential risks to the scheme (see section 5.4.2).

Underwriting

Underwriting is the process through which an insurer assumes liability for a financial risk (for example, the risk of a workers compensation claim) in exchange for payment in the form of a premium.

Underwriting is a key operational activity of insurers and necessitates comprehensive risk assessment to ensure premiums paid for insurance policies are sufficient to underwrite the relevant associated risks. Appropriate underwriting is an essential factor in an insurer’s financial viability. A strong underwriting process with appropriate controls and systems may assist insurers in avoiding exposure to operational losses, which may in turn impact the insurers ongoing viability.

SIRA’s assessment of the level of insurance risk as a result of underwriting may be informed through consideration of the sufficiency of the insurers’ underwriting capability, capacity, and processes.

Currently, within the CTP and Workers Compensation schemes, SIRA has issued guidelines in relation to market practice and premiums for policies of insurance which detail underwriting and pricing requirements and the process for premium filing reviews conducted by SIRA.⁵ For the HBC scheme, SIRA has issued guidelines in relation to premiums but not market practice.⁶

Claims management

Claims management relates to an insurer’s handling and administration of a claim made pursuant to an insurance policy or in relation to an insured risk. Inappropriate or insufficient claims management may negatively impact an insurer’s financial strength and viability, and ability to meet the costs of future claims.

In assessing the level of risk related to claims management, SIRA’s considerations may include, but are not limited to, the following:

• authority delegations
• settlement procedures
• claim verification criteria
• dispute resolution procedures
• compliance monitoring methods.

Product design and delivery

Product design risk relates to the risk to insurers arising from the design of an insurance product.⁷ The degree of product design risks will vary from scheme to scheme due to the inherent differences in the nature of the insurance product.

Within the bounds of the scheme’s design, statutory objectives and in accordance with the market practice and premium guidelines issued by SIRA, insurers may have discretion regarding how an insurance product is offered and delivered to customers.

SIRA may consider if the product design and how it is implemented by insurers will have an impact on insurers’ ability to meet their liabilities. This risk may be particularly relevant in newly established schemes, schemes where the terms of the insurance coverage is not entirely legislated, or where variations are made to existing scheme’s insurance product(s).

Pricing

Pricing may present a risk to insurer viability in circumstances where premiums set in respect to an insurance policy are insufficient or inadequate to meet the costs of future claims. Such a risk may eventuate where estimates that are made as to the claims, costs, and/or investment returns related to the sale of an insurance product are highly uncertain.

Assessment of insurance risk as a result of pricing may include consideration of:

• the insurers’ pricing processes and procedures (including the inclusion of actuarial and/or independent review processes)
• the extent of SIRA’s role in setting premium prices (for further information regarding this consideration refer to the discussion at section 5.5.1).

Additional considerations

Risk assessments should be undertaken with regard to a scheme’s risk profile. Considerations may include, but are not limited to the following:

• interaction between scheme design/legislation and insurance risks (for example, are there any scheme design factors or legislative provisions that may mitigate emerging insurance risks?)⁸
• market structure (for example, is the scheme privately underwritten, the number of insurance providers operating within the scheme, and size of the insurance providers)
• market share (for example, how much of the market does a particular insurer hold)
• the insurer’s diversification of operations (for example, are they engaged in other schemes and insurance markets or just this one)
• insurer maturity (for example, how long have the insurers been operating within the particular market or scheme)
• the nature of liabilities insured and claims handled (for example are the insured risks long tail claims, such as those in the Workers Compensation Scheme)
• adequacy of the insurers’ capital position
• any restrictions imposed by APRA on a regulated entity.

5.4.2. Scheme risks

The risk of an insurer being unable to meet its liabilities may have wider consequences for the scheme in which that insurer operates and may impact the overall health and sustainability of the scheme and the broader NSW economy.

SIRA’s risk assessment must be undertaken with necessary consideration given to:

• impact on ongoing scheme sustainability
• consequences for scheme affordability
• inherent financial implications such as costs to Government, policyholders, and other insurers operating within the scheme.

5.4.3. Organisational (SIRA) risks and considerations

SIRA must assess the potential risks and impact on the organisation and its regulatory objectives when deciding whether to hold insurer securities.

Reputational risk

The decision to hold or not hold securities can significantly impact SIRA’s reputation as a contemporary regulator.

SIRA must consider:

• that its reputation and regulatory capability may be undermined if SIRA fails to appropriately manage risks
• how to demonstrate a strong commitment to effective regulation and transparent decision-making processes in order to maintain stakeholder trust
• proactive communication to stakeholders including transparent and timely information about the decision-making process and its potential impact.

Operational considerations

Before deciding to hold securities, it will be necessary to take into account the financial impact to SIRA and the associated operational risks.

SIRA must consider:

• the costs of holding securities and potential benefits (cost-benefit analysis)
• its operational capacity, resourcing and skills required for the effective management of securities
• enforcement mechanisms, reporting requirements and compliance monitoring with securities requirements.

5.5. Risk mitigation and safeguards

The availability and adequacy of appropriate risk mitigation measures to avoid or minimise identified risks will inform SIRA’s decision to hold, or not hold, securities. In this assessment, SIRA may consider both internal and external mitigation measures and safeguards.

5.5.1. Internal

Various internal risk mitigation measures and safeguards may be available, such as scheme protection or guarantee funds, insurer licence conditions, re-insurance requirements and premium-pricing requirements.

Scheme protection or guarantee funds

SIRA should consider whether there are any protections or guarantee funds that have been established under the relevant legislation to meet the costs of claims and associated costs in the event of insurer insolvency within a scheme.

For example, the Nominal Defendant Fund (NDF), established under the MAI Act, provides for payment to be made in respect to the amount of any claim or judgment arising from or relating to any third-party policy issued by an insolvent insurer.

Where such a fund exists, it may operate as a safeguard to protect policyholders in the event an insolvent insurer cannot meet its obligations and liabilities.

Insurer licence conditions

SIRA may also provide provisions on prudential standards and the implementation of such standards to insurers through licence conditions, where prescribed under the relevant scheme’s legislation. Licence conditions may impose various requirements on an insurer regarding financial viability.

An insurer must comply with both the legislative requirements and licence conditions to maintain continuity of its licence. Decision-makers should consider, where applicable, if insurers within the relevant scheme are subject to licence conditions relating to financial viability, and the adequacy of any such conditions in mitigating identified risks.

Reinsurance requirements

Requiring the insurers within a scheme to have adequate reinsurance arrangements is another mechanism to mitigate insurer risk.

Reinsurance reduces the net liability on individual risks and offers catastrophe protection from large or multiple losses. SIRA sets out reinsurance requirements under each scheme. For example, in the Workers Compensation Scheme, a specialised insurer must have in place appropriate reinsurance coverage in respect of its workers compensation risks at all times, and the reinsurance cover must be provided by an insurance company authorised by the Australian Prudential Regulation Authority (APRA).⁹

SIRA’s role in setting premium prices

SIRA’s level of involvement or oversight in the pricing of insurance premiums may influence whether premiums are adequately priced and as a result, whether an insurer may become exposed to pricing risks. For example, in the CTP Scheme, pricing risk is considered by SIRA during the premium filing process for CTP insurers.

SIRA also sets out a process, under section 2.25 of the MAI Act, for excess profits and losses whereby the pricing risk is assessed over a period to determine whether insurers are experiencing excessive losses to the filed premium profits. Where excessive losses have occurred, payments from the Motor Accidents Operational Fund (MAOF) may be made to insurers.

5.5.2. External

SIRA will explore whether external bodies, such as the Australian Prudential Regulation Authority (APRA), provide mechanisms that sufficiently mitigate insurer risks, provide adequate safeguards, or impose security requirements on insurers.

APRA is an independent statutory authority that supervises institutions across banking, insurance, and superannuation industries, including general insurers. APRA is responsible for the general administration of the Insurance Act 1973. The main objects of the Insurance Act 1973 are:

• to protect the interests of policyholders and prospective policyholders under insurance policies in ways that are consistent with the continued development of a viable, competitive, and innovative general insurance industry; and,
• to promote financial system stability in Australia.

Under the Insurance Act 1973, APRA determines prudential standards and frameworks that must be complied with by general insurers¹⁰.

APRA’s Capital Adequacy Framework

The Capital Adequacy Framework implemented by APRA ensures that APRA-regulated institutions, such as general insurers, maintain adequate capital in relation to the scale, nature, and complexity of its obligations, and business and risk profiles. These institutions must comply with the requirements of APRA’s capital adequacy framework.

APRA’s Capital Adequacy Framework takes a three-pillared risk-based approach:

1. Quantitative requirements in relation to required capital, eligible capital, and liability valuations,

2. Supervisory review, including supervision of risk and capital management practices of regulated entities, and supervisory adjustments of capital (where necessary), and

3. Disclosure requirements to encourage market discipline.

Quantitative requirements

APRA-regulated institutions are required to maintain adequate capital against the risks associated with its activities.

A regulated institution must maintain a capital base in excess of a required level of capital known as the Prudential Capital Requirement (PCR) and determine its Prescribed Capital Amount (PCA).

The capital base must consist of eligible forms of capital, which meet conditions set out in Prudential Standard GPS 112 - Capital Adequacy: Measurement of Capital.

Supervisory review

APRA’s supervisory review process has four key principles:

(a) development and implementation of an Internal Capital Adequacy Assessment Process (ICAAP) by regulated institutions,

(b) APRA review and evaluation of ICAAPs, with supervisory action taken if quality is unsatisfactory,

(c) a regulated institution must operate above their PCR and in accordance with the framework of target capital levels and trigger points established in its ICAAP, with APRA able to adjust the PCR where there are prudential reasons to do so.

(d) early intervention by APRA if a regulated institution’s capital shows any sign of falling below the PCR with remedial action required if capital is not maintained or restored.

Disclosure requirements

Under Prudential Standard GPS 110 - Capital Adequacy (GPS 110), a regulated institution must make certain public disclosures about its capital adequacy position. This includes its capital base components and amounts, its PCA and its components. The information must be published so that it is readily accessible to both policyholders and other market participants.

APRA’s Risk Management Framework

APRA’s Capital Adequacy Framework is complemented by its Risk Management Framework, which requires a regulated institution to maintain a risk management framework appropriate to its size, business mix and complexity.

At a minimum, the risk management framework is required to address credit risk, market and investment risk, liquidity risk, insurance risk, operational risk, risks arising from the strategic objectives and business plans, and other material risks.

Decision-makers should refer to APRA’s Prudential Standard CPS 220 - Risk Management for further detail.

Considerations

SIRA should consider if an insurer is subject to any external regulatory requirements and whether those measures are sufficient when determining the need to hold securities. For example, CTP licensed insurers are subject to APRA’s regulation and required to meet its capital adequacy requirements, primarily outlined in Prudential Standard GPS 110 - Capital Adequacy (GPS 110). As a result, CTP insurers are already required by APRA to maintain adequate capital against the risks associated with its activities.

5.6. Decision

Following an assessment of the risks and available safeguards, SIRA will determine whether it will be necessary to hold insurer securities. This decision will be based on the level of risk present, the level of risk SIRA is willing to accept and the adequacy of available safeguards.

6. Risk monitoring

SIRA will undertake continuous monitoring to ensure the level of identified risk remains within SIRA’s risk appetite. The effectiveness of implemented risk mitigation measures and/or safeguards should also be reviewed on an ongoing basis.

Consideration should be given to any new information or issues, for example changes within an existing scheme, that may warrant the undertaking of a further risk assessment, or an alternative decision being made regarding the holding of insurer securities.

Ongoing risk monitoring will ensure SIRA is in a position to mitigate future risk, and/or minimise the impact of an issue, related to an insurer’s ability to meet its liabilities.

Glossary

References

1. SIRA does not regulate these schemes but exercises some regulatory responsibilities such as assessing premium determinations within the Sporting and Injuries Compensation Scheme, for example.

2. Government self-insurers are Government employers covered by the Government’s managed fund scheme. Under the Workers Compensation Act, the requirement for self-insurers to provide security deposits to SIRA does not apply to Government self-insurers.

3. Coal Mines Insurance is exempt from various provisions under the Workers Compensation Act 1987, including to provide security to SIRA (see section 7A of the Workers Compensation Act for example).

4. For example, section 182(1) of the Workers Compensation Act sets out the matters that may be regulated by conditions of licences, including a condition under subsection (c) requiring a charge or security to be taken by SIRA in respect of the assets of an insurer, or otherwise requiring the insurer to provide security, for the purpose of securing the payment of the insurer’s liabilities for the payment of compensation under the Workers Compensation Act.

5. See Parts 1 and 2 of the Motor Accident Guidelines for the CTP Scheme; and the Workers Compensation Market Practice and Premiums Guidelines for the Workers Compensation Scheme.

6. See Home Building Compensation (Premium) Insurance Guidelines.

7. Product design and coverage under the statutory CTP, Workers Compensation and HBC schemes are legislated.

8. There are significant scheme design and legislative differences between the CTP and Workers Compensation schemes regarding insurer licence durations and cancellations, which consequently expose the schemes to varying degrees of insurance risks. For example, SIRA may only issue licences to specialised insurers in the Workers Compensation Scheme for a term of up to five years (see part 7.1 of the Licensing framework for specialised insurers). The duration of licences for CTP insurers continues in force until it is cancelled (see section 9.4 of the MAIA). In the CTP Scheme, SIRA must not cancel a licence unless it is satisfied the licensed insurer has discharged all of its past, present and future liabilities (see section 9.11(6) of the MAIA).

9. See part 6.6.5 of the Licensing framework for specialised insurers.

10. ‘General insurer’ is a body corporate that is authorised under s 12 of the Insurance Act 1973 to carry on insurance business in Australia (s 11, Insurance Act 1973).