The Australian Prudential Regulation Authority (APRA) has released a package of prudential standards and guides aimed at improving governance and decision-making in the private health insurance (PHI) industry.

The package consists of three new prudential standards and two prudential guides:

• Prudential Standard CPS 510 Governance (CPS 510), a cross-industry standard on board governance and renewal, which replaces the equivalent PHI-specific standard, HPS 510 Governance;
• Prudential Standard CPS 520 Fit and Proper (CPS 520), which requires boards to establish and apply a written policy to ensure the competence and integrity of anyone exercising material influence over the company; and
• Prudential Standard HPS 310 Audit and Related Matters (HPS 310), requiring PHIs to appoint an auditor to provide independent advice on their operations, financial position, and risk controls.
• APRA has also released two Prudential Practice Guides, HPG 510 and CPG 520.

APRA will revoke Prudential Standard HPS 350 Disclosure to APRA, which is no longer necessary.

The revised prudential standards will come into effect from 1 July 2019.

Board renewal policies

HPG 510 includes guidance to PHIs on expectations for board renewal policies. It says there are limited circumstances in which maximum tenure limits exceeding 12 years would be appropriate. It also notes that circumstances, when a person is re-appointed as a director at the end of the maximum tenure period, would be exceptional.

APRA expects a Board renewal policy would document the maximum tenure period for each director, including the circumstances where the private health insurer may deviate from the terms of its tenure policy. APRA’s view is that long periods of tenure can affect a person’s capacity to exercise independent judgment.

APRA says these statements reflect APRA’s view, based on experience, that periods of long director tenure can impact on the ability of directors to exercise independent judgment.

In response to industry submissions, APRA says its guidance on director tenure is APRA’s strong expectation of sound governance practices and not a mandatory prudential requirement. Private health insurers can adopt an alternative approach in appropriate circumstances, but APRA expects the entity to be able to demonstrate that board renewal and succession planning is given sufficiently high priority.

APRA says its supervisors will consider the composition and membership of the board as part of ongoing supervision. Where concerns are identified, including concerns around board renewal, APRA will discuss these with the insurer involved and agree on a rectification plan where necessary. In doing so, APRA does not intend to create a disorderly transition and recognises that some restricted access and regionally based insurers may face a more limited pool of appropriately skilled and experienced directors. In such cases, APRA will look to understand the board renewal policy of those insurers and the process the insurer is taking to succession planning and identification of suitably qualified director candidates.

APRA considers the guidance is relevant across all APRA-regulated institutions and will update guidance for the other industries when a suitable opportunity arises.