The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, Chris Bowen today announced the limited exemption arrangements for direct offshore foreign insurers (DOFIs).
The Financial Sector Legislation Amendment (Discretionary Mutual Fund and Direct Offshore Foreign Insurers) Act 2007,which commences on 1 July 2008, requires DOFIs operating in the Australian general insurance market to be authorised insurers and subject to Australia's prudential regime. The Act also provides for a limited exemption to enable insurance business that cannot be appropriately placed in Australia to be supplied by a DOFI.
"The Government encourages financially sound, well managed foreign insurers into the Australian insurance market to increase competition and provide Australian business with adequate insurance options", Mr Bowen said.
"The Financial Sector Legislation Amendment (Discretionary Mutual Fund and Direct Offshore Foreign Insurers) Act 2007 requires DOFIs to be authorised and subject to APRA regulation, however, the exemption recognises that there are limited circumstances where insurance risks cannot be appropriately placed with an Australian authorised insurer and will need to be placed offshore.
"The exemption balances the need for protection for Australian business and consumers with the acknowledged need that some insurance will not be able to be placed in Australia.
"There will be scope to further limit the exemption as Australia's innovative and competitive domestic insurance market responds to more of the insurance needs that currently have to flow offshore because they cannot currently be written in Australia,"Mr Bowen said.
Retail insurance will not ordinarily flow offshore as a result of the exemption.
"Australian insureds are fortunate to have the benefit of a sound and world-leading prudential regime. The DOFI changes add to this by bringing DOFIs within the Australian prudential framework,"Mr Bowen said.
The exemption is comprised of three main limbs:
- high-value insured;
- atypical risk; and
- customised
The exemption arrangements were developed following extensive discussions with stakeholders. Details of the exemption are set out in the attachment.
The Australian Securities and Investment Commission will collect data from Australian Financial Service Licence (AFSL) holding intermediaries about the insurance business that is placed with DOFIs under the exemption. This will allow ongoing monitoring of the business flowing offshore and will enable the exemption arrangements to be reviewed.
Consumer protection will also be enhanced under the changes. Where an insured makes use of the atypical risk or customised limbs, the AFSL holding intermediary (for example, an insurance broker) will be required to disclose to the insured the risks of using an insurer not authorised in Australia.
Transitional arrangements will also apply to DOFIs who have applied for authorisation from APRA but have not received this authorisation by 1 July 2008. This will mean that a DOFI subject to transitional arrangements will not be in breach of the prohibitions and an insurance broker that deals with a DOFI subject to the transitional arrangements will not be in breach of the prohibitions.
An exposure draft of the regulations implementing the exemption arrangements will be released for consultation by late April 2008. Details of the consultation will be available on the Treasury website at www.treasury.gov.auMedia Contact: James Cullen - 0409 719 879
Attachment
Details of the limited exemption Arrangements For Direct Offshore Foreign Insurers
The exemption is comprised of three main limbs: high value insureds; atypical risks; and customised.
High-value insureds
This limb will allow Australia's largest businesses and global companies headquartered in Australia to use DOFIs as part of their risk management frameworks and to cover their global risks.
It recognises that high-value insureds are likely to be sophisticated purchasers of general insurance with complex risks that may not be able to be covered solely through authorised insurers.
High-value insureds will be defined as corporations, partnerships or trusts (either as a single entity or a group of related entities) that have:
- total group gross operating revenue in Australia of $200 million or more; or
- total group gross assets in Australia of $200 million or more; or
- total group employees in Australia of 500 or more.
The insured and/or their Australian Financial Service Licence (AFSL) holding intermediary will "self-assess"; against these thresholds, which will be set out in the Insurance Regulations 2002. If the insured meets the definition of high-value insured, the business could then be placed with a DOFI without the DOFI or AFSL holder being in breach of the prohibitions.
Atypical risks
This limb recognises that there are a number of limited specific atypical insurance risks that currently cannot be placed, on a stand-alone basis, with authorised insurers.
The exemption will apply to the following lines of insurance:
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The insured and/or their AFSL holding intermediary will self-assess against this list of insurance lines. If the insured is seeking a policy that corresponds to one of these lines, the business could then be placed with a DOFI without the DOFI or AFSL holder being in breach of the prohibitions.
Customised
This limb recognises that there will be a further range of circumstances where a business or consumer has a unique risk that cannot be placed with an authorised insurer or with a DOFI under the previous two limbs.
An assessment will be made, and documented, by an AFSL holding intermediary that represents the insured (that is, an insurance broker) to determine if a specific risk cannot be placed with an authorised insurer, taking into account the following criteria:
- a lack of market capacity;
- a material difference in price;
- a difference in non-price terms and conditions bearing a material impact on the business or consumer; and
- material benefits accruing from continuity of an ongoing relationship between a given insurer and the business or consumer.
If the AFSL holding intermediary is satisfied that the risk cannot be placed with an authorised insurer, the business could then be placed with a DOFI without the DOFI or AFSL holder being in breach of the prohibitions. The AFSL holder’s determination would need to be reasonable and be based on a reasonable level of investigation and market analysis.
Assessment of the exemption will be made at the time of negotiation, inception, renewal or material change in the terms and conditions of the relevant policy.
Further exemption
As a separate additional ground of exemption, an arrangement with a DOFI that is required by the law of a foreign jurisdiction will be exempt.