Refinements to the Australian General Insurance Prudential Framework particularly as regards Direct Offshore Foreign Insurers
On 3rd May 2007, the Minister for Revenue and Assistant Treasurer announced the Australian Government’s approach to the regulation of Discretionary Mutual Funds (DMFs) and Direct Offshore Foreign Insurers (DOFIs).
The Minister’s announcement and its legislative amendments respond to the HIH Royal
Commissioner’s Report on The Failure of HIH Insurance, released in 2003, which raised concerns regarding the lack of prudential regulation of DMFs and DOFIs. A review was commissioned by the Government to address these concerns and, in December 2005, the Treasury released a discussion paper on the subject. Submissions were received from a wide cross-section of the insurance industry and the Minister’s announcement in May 2007 has now established the Government’s policy.
The announcement indicated that:
- the Insurance Act 1973 (the Insurance Act) would be amended to subject DOFIs to prudential regulation;
- Australian Prudential Regulatory Authority (APRA) www.apra.gov.au prudential framework would be explicitly modified to apply to different categories of insurer based on their risk profile; and
- while DMFs would not be regulated at this stage, they would be required to provide data to APRA under the Financial Sector (Collection of Data) Act 2001 (FSCODA).
The Minister’s announcement also indicated that limited exemptions would be provided for DOFIs. The Treasury is developing options for such exemptions and will issue a separate consultation paper on this topic.
The changes to the Insurance Act and FSCODA are described within the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 (DMF & DOFI Bill), which was introduced to the Australian Parliament on 21st June 2007.
Changes to the Insurance Act are expected to be passed by Parliament in the second half of 2007 and are intended to take effect on 1st July 2008. Modifications to APRA’s prudential framework will generally be effective from 1st July 2008.
The changes to the Insurance Act will not change the position of foreign reinsurers which are not APRA authorised. These companies will be able to continue to accept business from APRA-authorised insurers without being required to be authorised by APRA under the Insurance Act. The prudential requirements for Lloyd’s underwriters will not change.
Additionally, APRA will emphasise that the total amount of premium an insurer may cede to reinsurers is not expected to exceed 60 per cent of gross written premium.
Whilst at present non-admitted insurance for non-statutory business is allowed in Australia these changes to the Regulatory system will alter this position. For example, local fronting will be a challenge depending upon the limited exemptions yet to be announced.
On 20th September 2007 the Australian Treasury published an Exemption Discussion Paper, Regulation of Direct Offshore Foreign Insurers, available at this link: Exemption Discussion Paper
In preparing this Spotlight article we received invaluable assistance from the leading independent risk advisers JMD Ross Insurance Brokers Pty Ltd in Sydney (www.jmdross.com.au) for which we are grateful
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