The Australian Prudential Regulation Authority (APRA) has signalled its resistance to lobbying from the Financial Services Council (FSC) to allow life insurers to mortgage the assets held in their statutory funds or to undertake geared investments directly from those funds.
Answering questions on notice from the Parliamentary Joint Committee on Corporations and Financial Services, APRA has acknowledged the lobbying efforts of the FSC which have included overtures to the Treasury and to APRA directly.
The FSC has sought to pursue the issue as a means of reducing red tape.
Dealing with a series of questions on notice from the Parliamentary Committee, APRA said it had prudential concerns with geared investments undertaken directly from a statutory fund by mortgaging the assets of the fund.
“Statutory funds are an important mechanism for policy owner protection, and they operate by ensuring that assets held by the life company for the purposes of undertaking life insurance business are segregated for the purpose of meeting policy owner claims,” the regulator said.
“The prohibition on mortgaging statutory fund assets is a fundamental part of a comprehensive regime regarding the management of statutory funds, along with other legislative provisions prohibiting reinsurance between funds, regulating how assets enter and leave the statutory fund, specifying the order in which assets are distributed in the event of the windup of an insurer and a range of other related matters,” the APRA answer said.
It said that allowing mortgaging of assets of the statutory fund risked weakening the policy owner preference afforded by the statutory fund as it provided the mortgagor with a claim on certain assets of the fund in preference to the protections and statutory priority afforded to policy owners.
APRA said that while a requirement that geared investments undertaken directly from a statutory fund be made on a non-recourse basis could partially mitigate some of the prudential concerns, it did not consider that it would be sufficient to reduce the potential risks to an acceptable level.
“There continues to be a risk that policy owner preference and protection will be weakened by
providing the mortgagor with a claim on certain assets of the fund in preference to policy owners,” the APRA answer said. “Additionally, the existence of the non-recourse lending could potentially introduce new risks or heighten existing risks.”
