Australia: Protecting Policyholders - Financial Claims Scheme Modified - How The Changes Affect You...

The Insurance Amendment Regulations 2009 (No.1) (Regulations) were released on 29 October 2009. The Regulations amend the Financial Claims Scheme (FCS), first established in October 2008 following the recommendations of the HIH Royal Commission. The FCS seeks to protect policyholders (of certain classes) who make claims on a general insurance policy in a situation where the insurance company is insolvent.

The changes

The Regulations clarify three key issues.

1. That the FCS is not intended to cover policy liabilities that were incurred by a foreign general insurer's Australian branch, if the liability was incurred before the branch received authorisation under section 12 of the Insurance Act 1973 to operate as a general insurer in the Australian market.
2. The commencement of the limitation period within which a policyholder with a protected policy must lodge a claim in order to be eligible for financial assistance from the FCS is:

• if a claim under the insurance cover is made after the Minister made the declaration, the day on which the Minister made the declaration
• if a claim under the insurance cover was made before the Minister made his declaration, the day on which the person made the claim.

1. That the general insurer retains to ability to:

• recover under its reinsurance arrangements
• claim contribution where there is double insurance (i.e. two insurance contracts cover the same risk).

The FCS to date

The Federal Government recently activated the FCS Policyholder Compensation Facility for the first time for a small general insurer, Australian Family Assurance Limited (which has been in run-off since 2002).

The Minister for Financial Services, Superannuation and Corporate Law announced that the Government, through APRA, will fund the payments under the facility for approximately 18 claimants and the costs will be recovered as far as possible through the subsequent liquidation.

This will provide a relatively small scale test-run to assess the effectiveness of the FCS. It remains to be seen whether further changes will be proposed stemming from any further lessons learned through this process.

What do the changes mean for you?

The Regulations provide insureds with further confidence that they can still claim on their policy, despite their insurer becoming insolvent.

Reinsurers and insurers covering the same risks as the insolvent insurer are not let off the hook. The Regulations ensure that the insolvent insurer is still able to pursue reinsurance recoveries as well as equitable contribution where available.

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