The long awaited Bill regulating the activities of Direct Offshore Foreign Insurers (DOFIs) was released earlier this year (Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007).
This followed the Minister for Revenue and Assistant Treasurer announcing on 3 May 2007 various measures to enhance the integrity of the Australian insurance market. These related principally to direct offshore foreign insurers (DOFIs) and Discretionary Mutual Funds (DMFs).
These important measures continue to generate much debate in Australia. This has been ongoing since the release of the Potts report in May 2004, a response to the HIH Royal Commission’s observations on DOFI's for the protection of less sophisticated purchasers of insurance from these entities.
The intention of the Bill, is that DOFIs will become subject to prudential regulation in Australia through amendments to the Insurance Act 1973 (Cth). This will be achieved by extending the current definition of "carrying on insurance" so that it captures anyone carrying on insurance both directly or through the actions of another. Marketing activities and advertising activities will be considered insurance business for the purposes of the Act if they have or are likely to have an effect in Australia.
The Bill will capture captive insurers which it was thought might be subject to a specific exemption. It will include DOFIs, their direct and indirect onshore agents, direct and indirect brokers of DOFIs and brokers’ agents.
The Bill introduces a prohibition on financial services licensees and their authorised representatives from dealing in a general insurance products unless it is through a general insurer or a Lloyd’s underwriter within the meaning of the Insurance Act 1973 (Cth). There is scope for an exemption for a person authorised under the Act by APRA.
In September of this year, the Treasury published an Exemption Discussion Paper. This proposed that there would be three exemptions from the requirements for a DOFI to be authorised under the Act.
The proposed exemptions are:
High value insureds
This will apply for DOFI’s providing insurance products to Australia’s largest publicly listed and private businesses.
The test for whether an insured is a ‘high value’ will require an insured to have:
a consolidated gross operating revenue for it and the entities it controls for the financial year of the $200 million or more; or
consolidated gross assets for it and the entities it controls for the end of the financial year of $200 million or more; or
300 or more employees at the end of the financial year.
Two alternative tests are also being considered, a premium based test (an aggregate premium in excess of $30,000 per annum) and an insurance cover based test (insurance cover in excess of $30 million).
Atypical risks exemption
This is for risks which cannot currently be placed as stand-alone insurance with authorised insurers.
Examples will include kidnap and ransom, malicious product tampering, commercial shipping hull, asbestos, nuclear, political environmental impairment and war.
This is for specific risks that authorised insurers may not be willing to insure and which do not fit within the first two exemptions granted to entities on a case by case basis.
It is proposed to deal with circumstances where, for example, authorised insurers refuse to renew insurance for a risk where a high profile or expensive claim has resulted in the past; where the necessary terms and conditions are not offered; or where there has been a significant increase in premium prices as a result of the hardening of the insurance cycle.
Comments have been sought by The Treasury in relation to the recently released Discussion Paper.
There will be an accompanying change in the prudential framework to seek to impose a different level of prudential stringency for insurers in a lower risk category. The idea is to recognise the differing risk profiles of captive insurers who insure only the risks of their own corporate parent company or group as opposed to an open market insurer.
DMF's will not be subject to prudential regulation at this stage. A rigorous and compulsory data collection regime will be put in place to determine whether regulation of DMF's is warranted.
The amending legislation is expected in 2008.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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