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
