New rules for foreign insurers in Australia

The Minister for Revenue and Assistant Treasurer, Peter Dutton MP, has announced reforms to enhance protection for Australian consumers and businesses from unauthorised direct offshore foreign insurers (DOFIs).

DOFIs are not currently subject to the provisions of the Insurance Act 1973 because they are not considered to be ‘carrying on insurance  business in Australia’ for the purposes of the Act.

The HIH Royal Commissioner’s report raised concerns about the regulation of DOFIs and DMFs. On 12 September 2003 the Government commissioned the Review of Discretionary Mutual Funds and Direct Offshore Foreign Insurers (the Potts review).

The Government will amend the Insurance Act 1973 (Insurance Act) so that anyone carrying on insurance business in Australia, either directly or through the actions of another, must become an authorised insurer.

As a result, the Insurance Act will apply to: DOFIs, including ‘captives’; foreign insurers and foreign reinsurers currently operating in Australia via an APRA-authorised branch or subsidiary; and domestic insurers and domestic reinsurers.

Limited exemptions will exist for DOFIs that underwrite risks that cannot be underwritten in Australia, either because the Australian general insurance market is too small or because it is not sufficiently specialised to underwrite the risk.

Offshore foreign reinsurers will not be required to be authorised in Australia, but they may be indirectly subject to the regulatory regime through the prudential standards applied to insurers. The Insurance Act provisions relating to Lloyd’s underwriters will not change.

A person who breaches the requirement to be authorised or who is complicit in such a breach will be liable to prosecution. A new Part will also be inserted into the Insurance Act 1973 to ensure APRA has  the power to investigate breaches.   Compliance will also be enforced through Federal Court injunctions. 

To complement these changes, the Australian Prudential Regulation Authority (APRA), will modify its prudential regulatory framework to ensure that there is clear recognition in prudential standards of different types of insurers. Tailored prudential standards will apply, so that categories of insurers posing a lower risk will face a reduced regulatory burden. Limited exemptions from the new Government reforms will be provided, enabling those unable to obtain appropriate cover domestically to access the world insurance market.

APRA will publish a discussion paper and consult with the insurance industry and other interested parties, as part of the development of the modified framework that is intended to apply from 1 July 2008.

UPDATE 21 June 2007: Bill introduced