Treasury Discussion Paper on exemptions to the regulation of direct offshore foreign insurers
24 October 2007Enactment of the legislation
The Financial Section Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007 has been passed. The Act amends the Insurance Act 1973, with the main provisions taking effect on 1 July 2008.
As a result, Direct Offshore Foreign Insurers (DOFIs) who issue insurance to Australian customers through an agent or broker will be required to hold a general insurance licence and will be subject to prudential regulation.
Limited exemptions to the requirement to hold an authorisation will exist for DOFIs that underwrite risks where insurance cover is not available in Australia. A discussion paper on the proposed exemptions was released by the Federal Treasury on 20 September 2007.
To complement the new regime, the Corporations Act 2001 (Cth) will be amended to require Australian Financial Services Licence (AFSL) holders and their authorised representatives, who are licensed to deal in general insurance products, to only deal in general insurance products of Australian-authorised insurers, unless an exemption applies.
Proposed exemptions
The Treasury Discussion Paper proposes three distinct types of exemptions from the need for a DOFI to be licensed or from the prohibition against an AFSL holder dealing with that DOFI. These exemptions will be contained in amendments to the Insurance Regulations. Each exemption will only apply to the specified business covered by the exemption—the DOFI may still need to be licensed in respect of business not covered by the exemption. The paper leaves unclarified the position of a DOFI in accepting business claimed by an insured to be exempt.
The three exemptions currently proposed are:
1. High value insureds exemption
This exemption will be for large Australian businesses which will be determined using a modified version of the Corporations Act test for large proprietary companies. The exemption will be available to an insured who satisfies at least one of the following criteria:
- $200 million or more in consolidated gross operating revenue for the company’s financial year
- $200 million or more of consolidated gross assets at the end of the company’s financial year, or
- 300 or more employees at the end of the financial year.
The insured and their AFSL holding intermediary will need to assess the availability of the exemption. Treasury has also raised for discussion alternative tests based on size of premium or insurance cover.
2. Atypical risks exemption
The atypical risks exemption will apply to certain less common insurance lines. The paper nominates the following indicative lines: kidnap and ransom, malicious product tampering, commercial shipping hull, ship owners protection and indemnity (over $50 million), asbestos, nuclear, political, environmental impairment, war and satellite or space cover. Once again, the insured (or its AFSL holding intermediary) will need to self-assess the availability of the exemption.
The AFSL holding intermediary will need to disclose to the insured the risks of insuring with a non-APRA licensed insurer including the risk that the claim may have to be defended in a foreign court, the risk that premium may not be recovered or that a claim may not be paid out if the insurer becomes insolvent.
It is proposed to review the list of exempted insurance lines after three years, however additional insurance lines could be added to the exemption list in the meantime.
3. Customised exemption
This exemption will be granted on a case-by-case basis, where risks cannot reasonably be placed with an authorised general insurer and the other exemptions do not apply. For example, where bad claims history means it is impossible to obtain insurance from an authorised Australian insurer or the cost of this insurance from such an insurer is prohibitive.
The test for the exemption will be criteria such as: (market) capacity, price, non-price terms and continuity of an existing relationship. Unlike the other exemptions, the availability will not be assessed by the insured. Treasury is seeking submissions on whether the assessment should be by the AFSL holder who represents the insured or by a regulator (either APRA or the Australian Securities and Investments Commission (ASIC)). Again, an AFSL holder will have to disclose the risks of insuring with a non APRA authorised insurer.
The proposals will be finalised following public submissions, which close on 31 October 2007.
Further details about the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007 can be found on our website.
For more information please contact
Title : Partner
Office : Sydney
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Email : terry.brigden@freehills.com
Title : Partner
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Phone : +61 7 3258 6632
Fax : +61 7 3258 6444
Email : mark.darwin@freehills.com
