REGULATION OF INSURERS
Australia operates a dual regulatory system, with prudential regulation of insurers being the responsibility of the Australian Prudential Regulation Authority (APRA) and consumer protection being the responsibility of the Australian Securities and Investments Commission (ASIC). APRA is responsible for the authorisation and ongoing prudential supervision of insurers. Any new insurer wishing to write business in Australia must receive authorisation from APRA to do so. APRA issues prudential standards that provide the principles which form the basis for authorisation and ongoing supervision of insurers. These principles include requirements in relation to capital adequacy and solvency, corporate governance, risk management and reinsurance management. The prudential standards have the force of law. All APRA-authorised insurers are subject to annual prudential review, which requires the participation of their board. All APRA-regulated insurers have ongoing data collection obligations.
ASIC is responsible for the licensing of insurers and insurance intermediaries, as well as the monitoring and supervision of consumer rights in relation to financial services, including insurance.
There are significant compliance obligations imposed on participants in the financial services sector in connection with APRA and ASIC supervision. The compliance obligations are frequently revised and updated. For instance capital adequacy standards for some insurers were revised in December 2011. In early 2012, capital adequacy standards for other insurers were reviewed. With this goes an expectation that directors of an Australian insurance company will have a full understanding of compliance and regulatory issues relevant to the business carried on in Australia.
Carrying on business as a general insurer or a reinsurer in Australia requires an authorisation from APRA in accordance with the Insurance Act 1973 (Cth) (Insurance Act). Only bodies corporate (or Lloyd's underwriters) are eligible for authorisation.
Since 1 July 2008, direct offshore foreign insurers carrying on insurance business in Australia, either directly or through the actions of another (for example, an insurance agent or broker) have required authorisation, unless they are only insuring risks that are within limited exemptions. It is an offence to carry on insurance business in Australia or undertake business incidental to carrying on insurance business in Australia without authorisation from APRA.
Also, an insurance intermediary cannot place insurance business with an unauthorised insurer. Regulations that provide for specific, but limited, exemptions from this prohibition came into force in 1 July 2008.
An authorised insurer must hold capital that meets minimum capital requirements set out in APRA's prudential standards.
APRA has a grading system for insurers where prudential requirements vary according to the size and risk profile of each insurer. If an insurer has reinsured with an offshore reinsurer that is not APRA-regulated, the APRA-authorised insurer is required to hold capital to match unsecured recoverables unless the offshore reinsurer has lodged security in Australia.
The Insurance Act does not apply to all forms of insurance. Life insurance, workers compensation and motor vehicle compulsory third-party personal injury insurance are regulated by separate legislation. Workers compensation and compulsory third-party motor insurance are regulated on a state and territory basis and typically a separate licence is required to participate in these classes. In some states and territories these risks are either provided for by state-controlled funds or state insurance entities – they are not available for private sector competition.
Medical indemnity insurance
Since the passage of the Medical Indemnity Act 2002 (Cth), medical indemnity insurance (also known as medical malpractice insurance) must be written by an APRA-authorised general insurer only and may not be provided on a discretionary unlimited basis. ASIC also has a regulatory role in respect of medical indemnity insurance, being responsible for the general administration of product standards and disclosure requirements that apply to medical indemnity insurance policies. These include the minimum cover limit that an insurer may offer or provide to a medical practitioner and the requirement that the contract provides an offer for retroactive and run-off cover for otherwise uncovered prior incidents.
All companies wishing to carry on life insurance business in Australia must be authorised by APRA in accordance with the Life Insurance Act 1995 (Cth) (Life Insurance Act). Life insurance business includes traditional whole-of-life insurance and endowment policies, continuous disability policies, contracts for the provision of annuities and investment-linked contracts. The Life Insurance Act requires the life insurer to act in the interests of the prospective and existing policyholders of the relevant statutory funds.
With limited exceptions, a foreign life insurance company must establish a subsidiary in Australia and have it authorised by APRA. All life insurance business in Australia must be conducted through the subsidiary.
In early 2012, APRA was reviewing and updating its capital standards for life insurers.
Private health insurance is provided through organisations registered under the Private Health Insurance Act 2007 (Cth). This Act together with the related rules define health insurance and who can offer it, and establish the regulatory regime for private health insurance providers. The financial performance of registered health funds is monitored by the Private Health Insurance Administration Council (PHIAC), an independent Federal Government body, to ensure solvency and capital adequacy requirements are met. PHIAC also monitors compliance with the rules. There are presently three rules in force:
- Private Health Insurance (Health Benefits Fund Administration) Rules
- Private Health Insurance (Insurer Obligations) Rules
- Private Health Insurance (Risk Equalisation Administration) Rules.
The Private Health Insurance Ombudsman is an independent body established to resolve complaints about a private health fund, a broker, a hospital, a medical practitioner, a dentist or other practitioners (as long as the complaint relates to private health insurance) and to be the umpire in dispute resolution at all levels within the private health insurance industry. The Ombudsman's services are available to health fund members, hospitals, medical practitioners (including some dentists) as well as health funds.
Other relevant acts
Financial Sector (Shareholdings) Act 1998 (Cth): Ownership in insurers (life and general) is governed by the Financial Sector (Shareholdings) Act 1998 (Cth), which limits shareholdings of an individual shareholder or a group of associated shareholders in an insurer to 15% of the insurer's voting shares. A higher percentage limit may be approved by the Treasurer on national interest grounds. APRA provides assistance to the Treasurer in this process.
Insurance Acquisitions and Takeovers Act 1991 (Cth): This Act sets out rules for acquisitions of Australian companies authorised to carry on business of insurance under the Insurance Act or the Life Insurance Act. Notification requirements are triggered by the acquisition of assets and agreements with directors. The Act requires notification of certain proposals to be provided to the Treasurer.
Foreign Acquisitions and Takeovers Act 1975 (Cth): This Act is administered by the Foreign Investment Review Board (FIRB) and requires the notification of and approval for certain increases in substantial shareholdings in an Australian company by a foreign interest. FIRB operates independently of the Insurance Acquisitions and Takeovers Act 1991 (Cth).
Terrorism Insurance Act 2003 (Cth): This Act provides terrorism cover where eligible general insurance policies have a terrorism exclusion. It also establishes the Australian Reinsurance Pool Corporation (ARPC). Private residential property is excluded from the ARPC scheme, which allows insurers to choose whether to reinsure or bear the terrorism risk themselves. Contracts eligible for the ARPC scheme include insurance for loss or damage to the insured's commercial property, business interruption and insurance for liability arising from ownership or occupation of eligible property. Every three years the Treasurer reviews the need for the Act to continue and recommends refinements. A review is scheduled for late 2012.
REGULATION OF INSURANCE CONTRACTS
The Insurance Contracts Act 1984 (Cth) (IC Act) regulates the content of general, life and medical indemnity insurance contracts. The most important exclusions are contracts of reinsurance, insurance covered by the Marine Insurance Act 1909 (Cth), workers compensation, compulsory insurance (for example third-party motor vehicle insurance) and state and Northern Territory insurance.
The IC Act does not codify the law, but lays down extensive rules in a number of areas, for example:
- The statutory duty of disclosure on insureds (of which the insurer must inform the insured) and an insurer can only avoid the contract for non-disclosure or misrepresentation in limited circumstances.
- Insureds must be clearly informed if cover is less than the standard prescribed cover in certain classes (eg home contents, motor vehicle, property damage).
- The insurer must clearly inform the insured of terms that are not usually included in similar policies or if it is not able to rely on them.
- Insurers can only refuse to pay claims under instalment policies if an instalment of premium has remained unpaid for 14 days and the insurer has clearly informed the insured, before or at the time the contract was entered into, that it may refuse to pay claims for non-payment.
- Persons who are not parties to the policy may in some circumstances be entitled to recover from the insurer.
- Renewal notices must be given to insureds.
- The requirement to give notice of cancellation and limits cancellation rights.
- The insurer's right to refuse to pay claims is limited, for example it cannot refuse to pay if there is a breach of a term of the contract requiring an act by the insured. Claim payments can only be reduced to the extent of any prejudice.
Medical indemnity insurance contracts
The suite of specific legislation governing medical indemnity insurance contracts includes the Medical Indemnity Act 2002 (Cth), the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Cth) and the Medical Indemnity (Run-Off Cover Support Payment) Act 2004 (Cth).
General Insurance Code of Practice
The General Insurance Code of Practice (Code) is self-regulatory. It requires insurers to adopt standards for the treatment of insurance claims and sets out minimum service standards to customers. This code also requires agent and employee training, plain English and comprehensible documentation, and complaints handling and dispute resolution procedures. An estimated 90% of general insurers in Australia have signed up to the Code. The Code is monitored by the Financial Ombudsman Office to ensure participants meet the Code's required standards. Some insurance products, such as workers' compensation, medical indemnity and marine, are not covered by this Code.
Life Insurance Code of Practice
Dealing with the design, distribution and marketing of life insurance products, the Code of Practice for Advising, Selling and Complaints Handling in the Life Insurance Industry regulates all conduct of life insurers as well as life brokers and life insurance advisers. APRA also issues life insurance circulars regulating various matters, including disclosure requirements and policy illustration rates.
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