The Minister for Revenue and Assistant Treasurer, Peter Dutton MP, today announced reforms to enhance protection for Australian consumers and businesses from unauthorised direct offshore foreign insurers (DOFIs).
“The reforms announced today are designed to address the risk to Australian consumers and businesses from unauthorised DOFIs that are unscrupulous or that fail,” Mr Dutton said.
“While Australia always welcomes well capitalised and well managed foreign insurers, we will now insist that they be subject to the same rules as Australian insurers,” Mr Dutton said.
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.
“This will ensure that Australian businesses remain internationally competitive while encouraging domestic insurers to continue providing innovative products that meet the needs of Australian consumers and businesses,” Mr Dutton said.
In addition, Mr Dutton announced that the Government would subject discretionary mutual funds (DMFs) to a rigorous and compulsory data collection regime, to better understand their use and operation. Within three years of the start of this regime the Government will review the data to determine whether prudential regulation is necessary.
Mr Dutton also announced that Australian financial service licence (AFSL) holders will be required to deal only in authorised general insurance products, with limited exceptions. AFSL holders will also need to supply data on any dealing in DOFI and DMF products.
“In October 2006 the International Monetary Fund found that Australia’s financial sector is mature and strong. These reforms will enhance the protection for Australians buying insurance and will enable the insurance industry to grow stronger,” Mr Dutton said.
Further information on the changes is available from www.treasury.gov.au.
Enhancing the integrity of insurance in Australia
Introduction
The Australian Government will implement a package of measures to enhance the integrity of the general insurance market in Australia. The background to these changes and a more detailed explanation is provided below.
Background
Direct offshore foreign insurers
Direct offshore foreign insurers (DOFIs) are unauthorised foreign insurers that sell insurance to Australians either directly or via another person who is in Australia, such as an Australian financial services licence (AFSL) holder that is a general insurance agent or broker. 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. As a result, DOFIs are not required to be authorised and thus establish either a branch or a subsidiary in Australia. Some DOFIs may be subject to prudential regulation in their home jurisdiction but that regulation is not likely to adequately address the interests of Australians should the DOFI behave unscrupulously or fail.
Discretionary mutual funds
Discretionary mutual funds (DMFs) offer ‘discretionary cover’, that is, an insurance‑like product that does not involve a contractual obligation to meet a claim if a risk eventuates. At its discretion, the DMF will consider meeting the costs of the claim. DMFs provide a means of risk management that is an alternative to insurance. DMFs sometimes cover risks for which insurance may not be available or affordable. DMFs benefit from cost advantages, when compared to authorised insurers, as state insurance taxes do not apply to DMF products and DMFs are not subject to prudential regulation under the Insurance Act 1973.
Brief history
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 Potts review sought public submissions and consulted with stakeholders. The Potts review reported to the Treasurer on 28 January 2004. The review found that DOFIs and DMFs account for approximately 2.5 per cent and 0.5 per cent, respectively, of the Australian general insurance market. The Potts review recommended that the Australian Prudential Regulation Authority (APRA) regulate all DMFs with ‘contingent risk’ and all DOFIs that did not come from a regime with prudential regulation that APRA considered comparable to the Australian prudential regulation framework.
In December 2005 the Treasury released a discussion paper seeking public submissions on proposals to implement the Potts review recommendations. Submissions in response to the discussion paper expressed concern regarding the breadth of the Potts review’s recommendations and how they could be implemented. The Treasury consulted further with stakeholders during 2006.
Direct offshore foreign insurers
Amending the Insurance Act
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.
Tailoring the prudential framework
To complement the changes to the Insurance Act, APRA will develop a modified prudential regulatory framework for all authorised insurers, both domestic and foreign.
It will use its current powers to tailor prudential standards according to categories of insurer that will take into account customer base, home regulatory environment, ownership structure and type of business offered by insurers.
Many of these matters are already considered by APRA in its regulatory approach but the changes will result in more structured and transparent requirements. The result will be that those insurers posing a lesser risk will face a reduced regulatory burden.
Changes for AFSL holders that deal in DOFI products
To reinforce the changes to the Insurance Act, the Corporations Act 2001 will prohibit Australian financial service licence (AFSL) holders from dealing in general insurance products that are not from an insurer authorised under the Insurance Act or from a DOFI that is exempt. AFSL holders will provide data to the Australian Securities and Investments Commission (ASIC) on their dealings in products from exempt DOFIs, with specific requirements to be set after further consultation.
Timing and further consultation
Subject to the passage of amending legislation and consultation, the changes set out above will provisionally commence on 1 July 2008. In the interim, there will be consultation on the tailoring of the prudential framework, the exemption arrangements and the data to be collected from AFSL holders.
Discretionary Mutual Funds
Prudential regulation of DMFs
At this time, and in the absence of appropriate data, the Government has decided that discretionary mutual funds (DMFs) will not be subject to prudential regulation.
DMFs continue to be subject to laws regulating financial service providers and companies or trusts (depending on the structure of the DMF).
The Government does not consider it appropriate to regulate DMFs established pursuant to, or recognised by, the laws of a state, for example, DMFs established for the benefit of local government or legal practitioners. The regulation of these DMFs remains a matter for the relevant state governments.
Data collection from DMFs
To ensure appropriate data is available, the Government will amend the Financial Sector (Collection of Data) Act 2001 to require DMFs to provide to APRA detailed data on their operations.
Data collection from AFSL holders that deal in DMF products
AFSL holders will be required to provide data to ASIC on their dealings in products from DMFs, with specific requirements to be set after further consultation.
Review of DMFs
Within three years of the start of the DMF data collection regime, the Government will review the data to determine whether there is a need for prudential regulation to apply to DMFs.
Enhanced disclosure by DMFs
In the interim, enhanced disclosure requirements for DMFs will ensure that Australian consumers and businesses have sufficient information to make decisions about DMF products.