The Australian Prudential Regulation Authority (APRA) today accepted Enforceable Undertakings from Zurich Australian Insurance Limited (ZAIL) and Zurich Financial Services Australia Limited (ZFSA) arising from two financial reinsurance transactions with General & Cologne Re Group Australia that were undertaken in 2000.

APRA took this action based on information gathered during its investigation which began in May 2004. APRA also alerted the Australian Securities & Investments Commission (ASIC) to the implications of the transactions and ASIC commenced its own investigation.

APRA’s investigation identified deliberate misrepresentations concerning the nature and the accounting treatment of the reinsurance transactions. These resulted in ZAIL’s profits in 2000 being overstated by $61 million. The effect of this action was that ZAIL appeared to meet the regulatory solvency requirement when it did not.

In the Undertakings, ZAIL and ZFSA accept that information was ‘withheld and misstatements were made’ to the regulator, auditor and actuary and that a number of people ‘knowingly misled APRA’ about the true nature of the reinsurance transactions ‘over an extended period of time by a course of conduct and actions’. ZAIL and ZFSA also acknowledge that the past conduct ‘fell seriously short of acceptable practice’.

APRA Deputy Chairman, Mr Ross Jones, said that APRA requires full, frank and timely disclosure from regulated entities. “Deliberate and coordinated misrepresentation is unacceptable as it impacts on our ability to best protect the interests of Australian policyholders,” he said. “APRA will rigorously pursue breaches of prudential requirements and secure remedial action.”

“Regulators cannot do their job effectively when regulated companies provide misleading information,” he said. Mr Jones added: “APRA accepted the Undertakings in light of the cooperation of ZAIL and ZFSA during APRA’s investigation, and their willingness to rapidly take all necessary remedial steps to address the problems which APRA uncovered.”

ZAIL and ZFSA have undertaken to improve their corporate governance, to regulate the way in which they deal with reinsurance issues in the future and to ensure ZAIL’s capital is maintained at its present healthy level.

While the undertakings resolve APRA’s issues from the investigation in relation to ZAIL and ZFSA, APRA is still to consider what action, if any, it needs to take in relation to individuals who were involved in these transactions.

APRA is satisfied that ZAIL more than adequately meets minimum regulatory capital requirements and that policyholders’ interests are adequately protected.

The Inspector who was appointed to undertake the formal investigation of ZAIL’s general insurance business is currently finalising his report.

A copy of the Undertakings is available on APRA’s web site at: http://www.apra.gov.au/General/Other-Information-for-GIs.cfm

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.APRA currently supervises institutions holding approximately $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.