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Security deposits for self and specialised insurers

Under the Workers Compensation Act 1987 self insurers and specialised insurers are required to provide financial security to ensure that other employers in the State will not be required to meet the cost of claims if these entities are not able to meet their workers compensation liabilities.

For the State Insurance Regulatory Authority (‘the Authority’), the critical issue is to ensure that the interests of all system participants are paramount by only accepting security that can be easily liquidated to meet the full value of existing and emerging claim liabilities.

This policy sets out the types of security that will be accepted and the terms under which they will be accepted.

Legislative requirements

Sections 214 to 215B (inclusive) of the Workers Compensation Act 1987 (the Act) set out the form that the security may take for self insurers.

Section 182(1) (c) of the Act, requires specialised insurers to provide security.

In summary, security deposits are able to be lodged as either one or a mixture of the following: 

  • cash (section 213). 
  • securities issued or guaranteed by the Commonwealth or the NSW Government (section 215) or securities issued by the Treasury of any other Australian State or Territory (section 215B). Unless any such securities are negotiable they are to be accompanied by a duly signed form assigning ownership to the Authority. The value of securities required to be lodged while deemed as face value can, at the discretion of the Authority, be assessed at market value.
  • guarantee from a bank, building society or credit union on terms acceptable to the Authority (section 215A).
  • bonds on terms acceptable to the Authority (section 215B).

Who is the beneficiary of the security?

Security deposits relating to self/specialised insurers are held by the State Insurance Regulatory Authority.

When entities complete transfer forms or guarantees, it is essential that the correct entity name as detailed above is used. Securities in the incorrect name will be rejected.

What types of security are accepted?

Self/specialised insurers may utilise any of the following or a combination of following types of security.

Cash

For self/specialised insurers, deposits are made direct to the Authority’s self insurer deposit bank account. The self/ specialised insurer will receive interest on these monies at the same rate and on the same basis that the Authority receives interest on that account from its banker. 

The insurer may elect to request the Authority to: 

  • hold the cash security in the Authority’s self/specialised insurer bank account with interest at the same rate that the Authority earns on the account.
  • where the amount is more than $500,000 – invest the security in a term deposit with an Authorised Deposit-taking Institution (ADI) as part of the Authority’s NSW Treasury Corporation negotiated arrangements. The term and the interest rate available at the time will be discussed with the self/specialised insurer (the terms available for this type of term deposit is three, six, nine or 12 months).

Securities

Only securities that are issued or guaranteed by the Commonwealth or the NSW Governments or those securities issued by the Treasury of any other Australian State or Territory are acceptable. 

Securities are to be lodged through the ASX Austraclear facility in the name of the Authority. Coupon payments are made to the Authority and then paid to the self/specialised insurer within 30 days of receipt by the Authority. The principal amount will be paid to the Authority on maturity unless an acceptable alternate security has been received by the Authority before the maturity date.

The level of security will be assessed on a mark to market as opposed to a face value basis to ensure that cash from the sale of the securities will, if required, equal the level of financial security required of the self/specialised insurer. 

Securities are marked to market every three months or earlier if the Authority, in its absolute discretion, determines that there has been a material movement in market rates.

If a self/specialised insurer provides any of the required security in the form of securities then should the total level of securities held by a self/specialised insurer fall below the threshold limit detailed below the self/specialised insurer will be contacted and requested to top up their security holding to the required level within 10 working days. 

Should the total level of securities be above the threshold limit the self/specialised insurer will be advised and invited to discuss options to reduce the level of security to the required level.

Requirements for security top up and any release of security will operate under the following threshold limits: 

  • Top up – If the total value of security falls to 95 per cent of the required total security value, the Authority may request a top up of security or lodgement of alternative acceptable security to the required security level.
  • Release – If the total value of security rises to 110 per cent of the required total security value, the self or specialised insurer may request the Authority to release security down to the required security level.

The Austraclear facility security management policy will be provided to all entities that have negotiable instruments (securities) lodged with the Authority or on request.

Guarantees

For a guarantee from a bank, building society or credit union to be acceptable to the Authority, such entities must: 

  • be an ADI that is regulated and classified by APRA as: 
    • an Australian owned bank 
    • a foreign subsidiary bank
    • a building society or
    • a credit union
  • not be subject to any ADI conditions imposed by APRA that restrict its abilities to provide guarantees to the Authority
  • apart from Australian owned banks, have a long term credit rating from Standard & Poor’s as ‘AA minus’ (or above) or Moody’s as ‘Aa3’ (or above). Where ratings differ between the above agencies the higher rating will apply.

Should an ADI cease to meet the requirements detailed above, a replacement security that is acceptable to the Authority (as detailed in this policy document) must be provided within 10 working days.

Should this not be provided within the above timeframes, then such a failure will become prima facie evidence of a breach of the licence conditions. The Authority may then, without further notice, require the guarantor to pay the guaranteed amount.

The total amount of guarantees held by the Authority, relative to the net tangible assets of the ADI, must not exceed 10 per cent. 

Foreign bank representative offices are not regarded as ADIs. 

For self insurers that are state owned corporations, the guarantee may also be provided by the NSW Treasury Corporation (Section 215A (1) of the Act).

Consideration will be given on a case by case basis to accepting guarantees from branches of foreign banks subject to them: 

  • being listed by APRA as a Branch of a Foreign Bank. 
  • having a long term credit rating of this branch from Standard & Poor’s being ‘AA’ (or above) or for Moody’s ‘Aa2’ (or above). Where ratings differ between the above agencies, the higher rating will apply. 
  • providing an undertaking from their ultimate holding company agreeing to it and all associated entities, being subject to the laws of NSW in any action taken by the Authority in respect to enforcing the guarantee and agreeing to meet the full costs of the State Insurance Regulatory Authority in enforcing the guarantee in Australian or foreign jurisdictions. 
  • ensuring the total amount of guarantees held by the Authority, relative to the net tangible assets of the Branch of the Foreign Bank in Australia not exceeds 10 per cent. 
  • prior to acceptance of the guarantee and then on agreed annual dates thereafter, providing a written certification by an Registered Australian Company Auditor detailing:
    • the current long term credit rating of the Branch of the Foreign Bank in Australia as determined by Moody’s and/or Standard & Poor’s
    • the Net tangible assets of the branch of the Foreign Bank in Australia.

Should the Branch of the Foreign Bank no longer meet the credit rating, net asset or reporting requirements outlined above then the Authority may, without further notice, require the guarantor to pay the guaranteed amount within 10 working days and/or require the self/specialised insurer to provide replacement security within 10 working days. 

The guarantee for self/specialised insurers must be in the format set out as Appendix A to this policy. This format has been agreed with all other Australian workers compensation regulators and has been accepted by major Australian financial institutions. Accordingly, the terms and conditions of the guarantee cannot be altered. All guarantees must be issued on the letterhead of the ADI. 

The Authority will not accept guarantees, from self/specialised Insurers that are time limited, rather the total amount of the security required is adjusted annually based on the annual actuarial assessment of the self/specialised insurer’s outstanding claims liability. 

Guarantees are held in a safety deposit box at the Authority’s bank. 

Guarantees from an entity that is controlled by the self insurer or specialised insurer are not acceptable.

Performance (insurance) bonds

The Authority will accept bonds on the following terms: 

  • Bonds are issued by APRA regulated insurers.
  • Issuing insurers to have a long term credit rating from Standard & Poor’s as ‘AA minus’ or above or for Moody’s ‘Aa3’ or above. Where ratings differ between the above agencies, the higher rating will apply.
  • The total amount of bonds held by the Authority, relative to the net tangible assets of the insurer issuing the bond, must not exceed 10 per cent.
  • Prior to acceptance of the guarantee and then on agreed annual dates thereafter provide a written certification by an Registered Australian Company Auditor detailing:
    • the current long term credit rating of the provider as determined by Moody’s and/or Standard & Poor’s
    • the Net tangible assets of the provider.

Should the insurer of the bond no longer meet the credit rating, net asset or reporting requirements outlined above then the Authority may, without further notice, require the guarantor to pay the guaranteed amount within 10 working days and/or require the self/specialised insurer to provide replacement security within 10 working days. 

When assessing the 10 per cent net tangible asset limit consideration on a case by case basis will be given to reinsurance policies that the insurer has in place for the bonds it issues. Among other matters reinsurance will only be taken into account where the reinsurer is licensed with APRA to conduct insurance business in Australia, meets the same credit rating requirement as that applying to insurers, any legal actions are subject to NSW laws and that the Authority has direct right to the reinsurance proceeds in the event that a call on the bond is made.

The bond for self insurers must be in the format set out as Appendix B to this policy. The bond must be issued on the letterhead of the insurer.

Bonds are held in a safety deposit box at the Authority’s bank.

Bonds from an entity that is controlled by the self insurer or specialised insurer are not acceptable.

Credit rating of providers of guarantees and bonds

It is the responsibility of the self/specialised Insurer to ensure that the entity providing the security meets the credit rating requirements outlined in this policy on an ongoing basis and is appropriately licensed by APRA. The Authority will check that providers meet this requirement on a periodic basis including via ensuring that the required audit certificates are provided. 

Should the Authority detect that any providers no longer meet the requirements of this policy, the self/specialised Insurer plus the security provider will be advised. If the issue is not rectified or alternative security not provided within 10 working days, the security may be called upon with monies received being held in the Authority’s bank account.

Swapping securities

Self insurers and specialised insurers are able to move between the various types of securities listed above and between providers of guarantees/bonds (provided these providers meet the requirements of the current security policy). 

While a ‘best endeavours’ approach will be adopted by the Authority, it is highly unlikely that it will be possible for a new security to simultaneously replace an existing security. For example, a guarantee from an ADI will not be released until an acceptable bond, guarantee or cash deposit has been provided. Similarly, a cash deposit will not be released until an acceptable bond or guarantee has been provided along with the necessary insurer’s bank details to enable the refund to be made. 

Where securities are transacted by Austraclear, the insurer will need to provide these securities first. Once clear title passes to the Authority the existing security will be released. This process could take up to two business days.

Payments of interest and securities refunds

Interest on securities and term deposits will be paid within 30 days of receipt of the interest into the Authority’s bank account. Interest on cash balances will be paid within 60 days of receipt.

Should the total level of security held be below the required level then interest will be withheld until the total security held meets minimum levels. 

All payments of interest on cash balances and earnings from securities will be paid via electronic funds transfer to a bank account nominated by the self/specialised insurer. No payments will be made by cheque. Any changes to the banking details (BSB or Bank account) that payments are to be made to must be provided in writing signed by a duly authorised officer of the self/specialised insurer. 

A printout from the payment system of the Authority will be provided to the authorised contact in the self/specialised insurer when the entity is first set up and after each request for a change of banking details has been made in the Authority payments system. The contact will be asked to confirm that the details where the payments will be made to are correct. 

A remittance advice will be emailed to the authorised contact for the entity for each payment made to the self/specialised insurer and to any other email address nominated by the entity.

Working day

A working day is defined as any day on which the banker of the Authority as applicable, has available a shop front location for conducting business banking activities in Gosford, Australia. 

The banker of the Authority is currently the Westpac Banking Corporation.

Attachments

ADI guarantee template (Microsoft Word document)
Bond guarantee template (Microsoft Word document)