Should brokers and corporate insurance buyers make submissions to the Senate Committee considering changes to the regulation of Direct Offshore Foreign Insurers?

Summary of the opportunity

Legislation has been introduced into the Australian Federal Parliament which will fundamentally change how Direct Offshore Foreign Insurers (DOFIs) can participate in the Australian general insurance market. The legislation may affect whether major corporate insurance buyers can access foreign insurers (through their broker or otherwise) for placement of large or difficult insurance programs or particular risks.

An opportunity to make submissions to the Senate Committee on suitable exemptions from the prohibition on dealing with DOFIs exists until 9 July 2007.

The legislation in brief

The Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 will require DOFIs to become authorised under the Insurance Act 1995 (Cth) and therefore comply with the same prudential regime that applies to local general insurers. If DOFIs do not become authorised, they must cease operating in the Australian market. Lloyd’s underwriters will not be subject to these changes.

The current definition of ‘insurance business’ in the Insurance Act will be expanded so that a person is taken to carry on insurance business in Australia, if the person carries on business outside Australia that would be considered to be carrying on insurance business if it was carried on in Australia, and they act in Australia through another person. The broader definition is intended to include offshore ‘captives’.

The reach of the Australian legislation will operate in practice by restricting Australian Financial Service Licence (AFSL) holders (via amendments to the Corporations Act 2001) to placing business with Australian-authorised insurers, unless the risk is one for which the yet-to-be published exemptions is granted.

Impact of the legislation

Implications for DOFIs

Some of the key issues arising from the introduction of this legislation for DOFIs will be:

1. what impact this legislation will have on a DOFI’s current Australian market presence
2. what requirements will need to be satisfied to enable a DOFI to become an authorised general insurer in Australia
3. what corporate structure or agency arrangement will be best for a DOFI to become an authorised general insurer
4. what prudential obligations will be imposed and how can they be satisfied, and
5. what alternative arrangements, if any, are possible to enable a DOFI to continue to participate in the Australian general insurance market.

Many of these questions cannot be answered by the limited information available in the draft Bill and accompanying Explanatory Memorandum. Much of the detail is yet to follow in the Regulations and Prudential Standards to be released by APRA.

Implications for corporate insurance buyers and brokers

Corporate insurance buyers (and their brokers) who rely on foreign markets to offer cover not otherwise available in the Australian market, or provide capacity on large risks, may be affected:

1. Access to these markets will be limited to those DOFIs who become authorised general insurers in Australia, as brokers operating in Australia will not be able to access DOFIs that are not authorised in Australia (without breaching their AFS Licence)
2. Alternatively, it seems possible that where a corporate appoints a broker who is not domiciled in Australia, no limitation will be imposed on the use of foreign insurers to participate in their insurance program. This arrangement will effect local brokers and may cause headaches where a corporate insurance buyer appoints one local broker to act as advisor and another, perhaps based on London, to act as their placing broker
3. Another possibility is that brokers could be left out of the process entirely, since (interestingly) where an Australian initiates contact with the DOFI, the DOFI will not be carrying on insurance business in Australia and will not be required to become APRA authorised. The practical reality of access to such markets may however only apply to a limited group of major corporates within the Australian insurance market, as contact cannot be channelled through a broker in Australia, and
4. Barring one of the above ways of getting around the legislation (and absent exemptions) there is a risk that major corporates will be unable to access DOFIs who prefer to shun the Australian prudential regulation. This means that it may be harder to place (or at least may have reduced options in seeking to place) risks that cannot be underwritten in Australia, either because the Australian general insurance market is too small for the size of the program (or risk) or because it is not sufficiently specialised to underwrite the risk.

Exemptions

The exemptions may be one avenue available for relief.

Given that the Government’s underlying intention appears to be to provide an even ‘playing field’ for existing local insurers in competing with foreign insurers wishing to participate in the Australian insurance, it is likely to be open to submissions concerning exemptions which apply to circumstances where comparable insurance is not readily available in the Australian market.

The challenge will be to define what is encompassed by ‘comparable insurance which is not readily available in the Australian market’.

Perhaps the difficulties with defining an exemption from that perspective could be overcome by seeking to exempt a certain classification of insurance buyer (regardless of the cover sought), such as an ASX listed entity, particular classes of risk, or risks above a certain dollar amount?

Recommendations

The Bill has been referred to the Senate Economics Committee for reporting by 31 July 2007. The Committee invites written submissions to be received by 9 July 2007.

The value of submissions to the Committee cannot be undervalued. It is suggested that DOFIs, insurance intermediaries (brokers) and corporate insurance buyers consider lodging a submission.

Any suggestions as to appropriate exemptions which should be carved out of these obligations could be useful for the Committee.

Submissions can be sent to:

Committee Secretary
Senate Economics Committee
Department of the Senate
PO Box 6100
Parliament House
Canberra ACT 2600
Australia

Phone +61 2 6277 3540
Fax +61 2 6277 5719
Email economics.sen@aph.gov.au

Further details about the Committee and lodging a submission can be found at the Parliament of Australia – Senate website.

This article was written by Mark Darwin, Partner, Brisbane and Diana Masen, Solicitor, Sydney.

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