Insurance Brokers and DOFI Requirements
Insurance Brokers Obligations in relation to DOFIs (Taken from the NIBA Newshot, Insurance Brokers Obligations In Relation to DOFIS, dated 20 June 2008)
The Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007
This Act significantly changes when and how insurance brokers are able to access Direct Offshore Foreign Insurers (DOFIs) for their clients.
Put simply the legislation provides that, unless an exemption applies, from 1 July 2008:
This paper provides a summary of the key changes and the obligations that NIBA members have under this legislation and associated regulations. The paper is by way of guidance only and is not intended to be legal advice. As always, NIBA members should obtain their own professional advice to ensure that their particular circumstances are properly taken into account when seeking to comply.
The DOFI Requirement
Before the Act, the general view was that an offshore foreign insurer could sell general insurance products to Australians without obtaining authorisation under the Insurance Act by:
· offering insurance in the Australian market through agents here; or
· solely from overseas; for example, via a direct approach from the client or its broker, or the internet.
The new changes affect the above position significantly.
The definition of insurance business still catches the act of "undertaking liability by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event" in Australia, i.e. direct business by a foreign insurer underwritten here would still be caught.
However, the new definition now provides that an insurer will be seen to be carrying on insurance business in Australia if it carries on this business outside Australia and another person acts:
· directly or indirectly on behalf of the insurer; or
· as a ‘broker of insurance’ provided by the insurer, or directly or indirectly on behalf of such a broker,
in relation to the insurance business of the insurer carried on outside Australia.
In addition, the changes broaden the definition of what is caught by providing that the following incidental activities occurring prior to the insurer accepting liability are also caught as insurance business (even if carried out by the insurer overseas):
· inducing others to enter into contracts of insurance with the person as the insurer;
· publishing or distributing a statement relating to the person's willingness to enter into a contract of insurance as an insurer; and/or
· procuring the publication or distribution of such a statement.
It is not intended that the expanded and clarified definition of insurance business capture incidental activities that take place after the insurer has undertaken the liability such as handling claims, operating accounts, making payments or holding records on behalf of an overseas foreign insurer.
Provided the insurer avoids the conduct referred to above, an insured might still be able to approach a foreign insurer directly and do the business overseas without the insurer having to be authorised.
As a result all DOFIs that fit within the expanded definition will have to be authorised under the Insurance Act if they wish to carry on insurance business in Australia, unless an exemption applies.
Lloyd’s underwriters are not caught under the expanded definition and will continue to be able to conduct insurance business in Australia in the same way as they did prior to the passage of the legislation.
The normal existing exemptions in the Insurance Act remain unchanged but for an additional exemption for reinsurance business carried on by:
· a body corporate incorporated in a foreign country; or
· an unincorporated company established, under a law of a foreign country, that under that law may sue or may be sued or may hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose,
that is not a general insurer (that is, a body corporate authorised under s 12 of the Act to carry on insurance business in Australia through a branch or subsidiary in Australia).
There are exemptions in the Regulations that are discussed further below and which enable limited access to unauthorised insurers.
The arrangements are administered by the Australian Prudential Regulatory Authority (APRA) which has been given additional enforcement powers.
The AFS Licensee Requirement
The Corporations Act, under which insurance brokers obtain an AFS licence, prohibits, from 1 July 2008, a licensee or authorised representatives from “dealing” in a general insurance products unless it is from an authorised insurer, a Lloyds’ underwriter or an exemption applies. “Dealing” is defined in section 766C of the Corporations Act and its meaning is discussed in ASIC’s Regulatory Guide 36 Licensing. Financial product advice and dealing.
As a result, insurance brokers will not, from 1 July 2008, be able to, acquire, vary, or dispose of a general insurance product (or arrange for this) for a client unless the product is from an authorised insurer, Lloyd’s underwriter or an insurer that is subject to one of the relevant exemptions.
“Dealing” under the Corporations Act does not include acting as a clerk or cashier, making a mere referral or providing advice about insurance offered by an unauthorised insurer to clients.
The restriction on intermediaries using unauthorised insurers only applies to AFS licensees and to authorised representatives. It does not apply to a person such as a UK insurance broker (provided their conduct does not make them subject to the Corporations Act).
ASIC is responsible for the administration of AFS licensing requirements generally and will also monitor this new licensing provision. A breach of the requirement is a breach of the obligations of AFS licensees and may be grounds for ASIC to vary, suspend or cancel a person’s AFS licence or apply for a banning order against that person. Licensees who become aware that they have breached the requirement must lodge a breach report with ASIC under s912D of the Corporations Act.
The Regulation exemptions impact on DOFIs conducting insurance business in Australia and to AFS licensees and authorised representatives placing insurance with DOFIs.
There are four separate categories of exemption, namely:
The assessment of whether a policy satisfies the first three categories mentioned above is an objective one, that is, there is no judgement involved as to whether or not the relevant criteria are satisfied. The decision should be one based on the relevant facts.
The customised exemption is, however, different. Under this exemption an insurance broker will need to consider a range of factors before making a reasonable judgement as to whether the relevant criteria has been satisfied. A judgement involving investigation, market analysis and reasoning is needed.
High-value insured exemption
The high-value insured exemption applies to exempt a policy issued to at least one proposed or actual contracting insured (i.e. the parties to the insurance contract and not third party beneficiaries or interested parties) that meets the following criteria, either as an individual basis or as part of a “related group” (see definition of related group below) (policyholder):
A “related group” means:
The thresholds are calculated by averaging the relevant, revenue, assets or employees at the end of the previous three financial years. If they weren't in existence for such a time, it is based on the most recent financial years for which they were in existence.
Only one of the three criteria needs to be satisfied in order for the exemption to apply.
Only the revenue, assets or employees of the policyholder (in its own right or as part of a related group), will be included in determining whether the entity is a high-value insured and not those of other possible beneficiaries under the policy.
Provided one policyholder is exempt (in its own right or as part of a related group) the whole policy is exempt even if it covers other contracting insureds or beneficiaries that are not within the exempt entity definition themselves.
The exemption only applies if the criteria are met. Insurance brokers need to be careful as an insurance broker would breach their AFS licence requirement if the exemption is found not to apply. It is a strict liability offence i.e. a breach triggers the penalty irrespective of intent.
The insured or their insurance broker is able to self-assess eligibility against the criteria. The insurance broker would normally be able to rely on information supplied by the insured as to the insured's status as a “high-value insured”.
The atypical risk exemption
The atypical risk exemption applies to the following risks covered by stand alone policies:
The atypical exemption has been extended to include a loss or liability incidental to the listed atypical risks
Definitions for these risks are included in the Regulations under the Insurance Act.
Equine insurance was included very late in the Regulation development process.
If a policy covers both an atypical risk and another risk (to the extent that it is not incidental), the exemption only applies to the atypical risk and not to other risks covered by the policy.
If the insured is seeking a policy that corresponds to one of the above lines the relevant policy would be automatically exempt and the insurance would be able to be placed with a DOFI.
Insurance Contracts Required by Foreign Law
An exemption is also available for certain overseas risks. A contract will be exempt if a law of a foreign country requires that a contract be issued by an insurer authorised or permitted by the laws of that country to issue that kind of insurance. For example, an Australian business operating in Country X that is required by the law of Country X to take out workers compensation with an insurer authorised in Country X will be able to place this business with a DOFI in Country X without the DOFI or the AFS licensee being in breach of the prohibition.
In this case an insurance broker after making an assessment of the overseas market and the legal requirements relating to that market would be able to arrange insurance with a DOFI that is able to operate in the overseas market.
The customised exemption
The customised exemption is an exemption for risks (other than those covered by the previously discussed exemptions) that cannot be placed in the Australian market. An assessment will need to be made in writing if a specific risk "cannot reasonably be placed with" an authorised insurer.
The insurance broker, in making the assessment, must be satisfied on reasonable grounds that:
· there is no authorised insurer that will insure against the risk; or
· the terms (including price) on which any authorised insurer will insure against the risk are substantially less favourable to the insured than the terms on which the DOFI will insure against the risk; or
· there are other circumstances that mean that insurance with an authorised insurer is substantially less favourable to the insured than with the DOFI.
The determination by the insurance broker will need to be based on an investigation and assessment of the local market and the justification for the determination documented in writing.
The phrase "substantially less favourable” is not defined in the legislation but would be likely to be given its commonly understood meaning. “Substantial” is likely to be seen as being of material nature; of ample or considerable amount, quantity, size; of real value or worth. Insurance brokers must be able to demonstrate that they have acted reasonably in the circumstances and that their determination is based on a reasonable level of investigation and analysis.
Some factors may support the use of the exemption while others may not. The insurance broker will have to arrive at a decision after considering all the relevant issues. Professional judgement is required.
The insurance broker is required to maintain written records of its inquiries and reasons in support of its decision as well as the written determination justifying the decision. The written determination is to be available to ASIC on demand. It also needs to be given to the insured on request. The insured would then be able to use another intermediary to place the risk with a DOFI without breaching the normal prohibition.
Where ASIC believes that the insurance broker had not formed a view that was reasonable in the circumstances, ASIC is able to take action against the broker for a breach of licence obligations.
Insurance brokers that place insurance business with DOFIs will need to have in place appropriate procedures for administering the requirements and to ensure ongoing compliance.
Factors to consider when granting an exemption
Some of the issues that an insurance broker might consider before making a determination follow.
The traditional insurance broker is required to act in the interest of the client. Understanding and meeting the needs of the client should be a primary concern of insurance brokers in exercising the customised exemption.
Insurance brokers do have obligations to clients when placing insurance with an insurance company irrespective of whether or not the insurer is authorised in Australia. The requirement to obtain an exemption prior to placing a policy with a DOFI does not alter those obligations to the client.
There is no requirement compelling a broker to place insurance with an authorised insurer that is not regarded as suitable for that placement. The exemption arrangements simply require the broker to undertake reasonable enquires and if they conclude there is no satisfactory insurance available domestically, be able to justify the decision.
In providing the justification the broker is required to undertake reasonable investigation and to outline the basis for the decision in writing. The relevant investigation need not necessarily be undertaken specifically for a particular placement but could have regard to previous market research undertaken by the broker or another organisation or upon a security assessment process that is updated on a regular basis. Much will depend on the circumstances of the individual situation as to what is reasonable.
No Australian insurer will insure against the risk
The requirement that there is no authorised insurer that will insure against the risk does not mean that the insurance broker must approach and receive a negative response from each of the 130 odd insurers or Lloyds underwriters that operate in Australia before being able to rely on this particular criterion. The insurance broker only has to make reasonable enquires and not exhaustive inquires.
Not all of the 130 odd authorised insurance companies or Lloyds’ underwriters write all classes of insurance business. Some specialise in particular lines of insurance while others limit their exposure in particular areas or ways. The decision as to how much and on what terms an insurer is willing to write particular lines of insurance is generally up to the individual company concerned having regard to such factors as regulatory requirements, expertise, available capital, appetite for risk and reinsurance arrangements. While there is considerable capacity in the Australian insurance market at the present time that has not always been the case. Market capacity does vary considerably from time to time as does the local market’s willingness to underwrite particular risks.
An insurance broker should use his/her expertise and market knowledge and conduct reasonable inquiries when considering whether or not there is an authorised insurer that will insure against the risk. This is likely to include making inquiries of the insurers most likely to offer the relevant type of cover.
Terms and other circumstances
Price is the premium that an insurance company charges for a policy. Whilst it is relatively easy to compare the price of one insurance policy with another it is not so easy to determine value for money in an insurance policy. The nature and extent of the coverage offered by insurance companies can vary significantly. Wide coverage in a policy may be attractive to a client even if that wider coverage comes with a considerable increase in premium.
The quality of the product offered by both the local market and the DOFI needs to be considered by the insurance broker when making a determination. Quality typically encompasses the terms and conditions of the insurance product, the security of the insurer and the ability of the insurer to service the needs of the client. High quality is usually evident when:
· the terms and conditions of the policy wording are broad with few or no exclusions,
· the insurer is highly regarded financially by insurance brokers generally,
· the insurer has sufficient expertise to understand the client’s requirements and to satisfy the client’s needs, including in relation to claim payments and other service requirements; and
· the insurer has the capacity to undertake the risk.
Clients normally have a preference for high quality insurance but in some cases they have to balance it against other considerations such as market capacity and price.
“Other circumstances” could include the need to continue an existing relationship. There are many situations where a client would like to continue an existing relationship with a particular insurer, including where a large claim had recently been lodged that was yet to be settled by the insurer or where the policy was a claims made and notified policy and a change of insurer could result in a loss of continuity of cover. Also a client would be reluctant to change insurer if there was any doubt about the long term ability of a new insurer to service the client’s needs on an ongoing basis. Market situations and an insurer’s appetite for risk can and do change and clients generally seek to avoid being stranded without appropriate insurance cover.
In comparing the terms and other circumstances of an authorised insurer’s product with a DOFI product it is a requirement of the legislation that the authorised insurer’s product has to be substantially less favourable to the insured before the product can be placed with a DOFI.
Statistics about Exemptions
ASIC will collect data from insurance brokers about the insurance business that they place with a DOFI under exemption. This will allow ASIC to better oversight the exemption arrangements and for the Government to monitor the insurance flowing overseas.
Similar information will need to be provided in relation to business conducted with a DMF.
Warning When Business Placed with A DOFI
Regulations under the Corporations Act require insurance brokers that, make use of the atypical risk exemption and the customised exemption or an insurer relying on the transitional relief available to insurers seeking authorisation prior to 1 July 20008,
to disclose to the insured the risks of using an insurer not authorised in Australia.
The Insurance Brokers Code of Practice goes further than this legislative requirement. It requires insurance brokers to inform clients of the relevant risks involved in dealing with a foreign general insurer and to seek a written acknowledgement from the client before placing their insurance with such an insurer.
A new form of notice has been prepared to take account of the changes to the Corporation Act requirements. See Attachment.
When do the Arrangements Commence?
The DOFI requirements come into effect for insurers from 1 July 2008. From that date the insurers must be authorised under the Insurance Act or fall under the scope of an exemption in order to carry on insurance business after that date. A transitional arrangement applies for certain existing insurance business.
A transitional arrangement will also apply to DOFIs that have applied to APRA for authorisation but have not received the authorisation prior to 1 July 2008. Such DOFIs will be provided with transitional relief until their application is approved, denied or until 31 December 2008 whichever occurs first. Insurance brokers will not be restricted from placing insurance with such DOFIs during the transitional period. APRA will be publishing a list on their website, http://www.apra.gov.au , of the companies that the transitional arrangements apply to.
The AFS Licensee requirement prohibits brokers from dealing in an insurance product from 1 July 2008 unless the insurer is authorised or an exemption applies.
In other words, if a broker acquires, varies or disposes of a DOFI's insurance policy for a client (or arranges for this) before 1 July they will not breach the legislation. If they do so after this time they will be in breach. The date of commencement of the insurance policy is not relevant to an insurance broker’s obligations under the Corporations Act in relation to placing insurance with DOFIs. Accordingly, prior to 1 July 2008, an insurance broker would be able to assist a client to acquire a contact the risk for which commenced after 1 July 2008.
While the new arrangements for dealing with DOFIs commences on 1 July 2008, it should be noted that it is not necessary to report to ASIC information in relation to insurance contracts with DOFIs prior to 1 October 2008.
NIBA UNAUTHORISED FOREIGN INSURER NOTICE UPDATE
Changes to the Corporations Act notice requirements
As a result of changes made to the Insurance Act 1973 (Cth), new notice requirements apply to insurance brokers for services provided to wholesale clients in relation to unauthorised foreign insurersunder the Corporations Act 2001 (Cth) (Regulation 7.7.20A of the Corporations Act).
New information must be given by a person providing a financial service to awholesale client that relates to:
· an insurance contract an unauthorised foreign insurer can issue by reason of the new Insurance Act exemptions for Atypical risks and Insurance contracts for other risks that cannot reasonably be placed in Australia (See Insurance Regulations 2002); or
· the wholesale client dealing with an entity exempt under Regulation 12 Transitional Arrangements for Entities Seeking Authorisation or Exemption of the Insurance Regulations 2002 (ie an entity that has sought authorisation under the Insurance Act pre 1 July 2008)
The information must be given either when:
· the person would be required to give a statement of advice if the service was provided to a retail client (ie personal advice is provided); or
· the contract is offered or issued to the wholesale client (i.e. the same triggers that apply to a broker when they have to give a Product Disclosure Statement to a customer).
The following information is required:
· a statement that the insurer is not authorised under the Insurance Act 1973 to conduct insurance business in Australia; and
· a statement that the insurer is not subject to the provisions of the Insurance Act 1973, which establishes a system of financial supervision of general insurers in Australia; and
· a statement that the wholesale client should consider whether to obtain further information, including:
o the country in which the insurer is incorporated, and whether the country has a system of financial supervision of insurers, and
o the paid up capital of the insurer; and
o which countries laws will determine disputes in relation to the financial product.
INSURANCE BROKER CODE OF PRACTICE
The Insurance Broker Code of Practice requires the broker to inform the client of the relevant risks involved in dealing with a foreign general insurer that is not authorised under or subject to the provisions of the Insurance Act 1973, which establishes a system of financial supervision of general insurers that carry on general insurance business in Australia. The insurance broker is required to seek written acknowledgement from the client before placing any of their insurance with such an insurer.
PROPOSED FORM OF NOTICE
NIBA prepared a guide for placing business with direct offshore foreign insurers in 2006 in which it discussed issues associated with arranging insurance with an unauthorised foreign insurer.
An example notice was provided with this document which was designed to be provided to retail and wholesale clients irrespective of the Corporations Act requirements, to better protect a broker's interests when arranging insurance with an unauthorised foreign insurer.
As a result of the above changes, the notice requires some minor amendments to contain the new Corporations Act content described above and a revised version is set out below.
It is an example only and does not take into account your specific circumstances. It does not warrant or guarantee protection from any claim by a client that you have not complied with your duty of care or contractual or other obligations, as this will depend on the particular circumstances.
UNAUTHORISED FOREIGN INSURER NOTICE
Your insurance contract(s) is/are proposed to be arranged (wholly or partly) with a foreign insurer that is not authorised under the Insurance Act 1973 to conduct insurance business in Australia. Such insurers are not subject to the provisions of the Act, which establishes a system of financial supervision of general insurers in Australia that is monitored by the Australian Prudential Regulation Authority (APRA).
In no case do we warrant or guarantee the current or ongoing solvency of an insurer when you buy insurance. We cannot accept responsibility for the financial viability of any insurer because this is beyond our area of expertise and we have no control of the insurer's performance which can be affected by many complex commercial and economic factors. The solvency of an insurer can change significantly between the time an insurance contract is entered into and the time a claim may be made.
Your policy will identify if it and the insurer are to be subject to Australian law and jurisdiction.
Where they aren't subject to Australian law and jurisdiction, you may not have the protection of Australian legislation such as the Insurance Contracts Act 1984 and you may have to resolve any dispute in a foreign jurisdiction.
Even where they are subject to Australian law and jurisdiction, we do not warrant or guarantee that this will be the case and there is a risk that the insurer will not meet its obligations and you may need to seek to enforce your rights against it in a foreign jurisdiction.
The name of the insurer, their country of domicile and website address is shown below.
You should consider whether to obtain further information on the insurer in order to make your decision (we can assist you in this process), including its country of incorporation, what scheme of financial supervision applies (if any), its paid up capital, its rating by credit rating agencies and its financial reports.
Country of Domicile _____________________________ Website Address __________________
Please also note that:
· This notice also applies to all variations and renewals of the insurance arranged by us with the insurer.
· If you have been told anything which is inconsistent with the above by our representatives, please tell us, as it is our company policy and no exceptions apply.
· If you have any questions do not hesitate to contact us.
I/we (insert full name) ____________________________________________________________
of (insert address) _______________________________________________________________
confirm I/we have read, understood and agree to the terms of the above notice and that if there is more than one insured and any have not signed this form, I /we are signing it with authority of and on behalf of the insured(s) that have not signed.
Date: __/__/__ Signature of Insured(s)_____________________________
Company / Trading Name(s), if applicable ___________________________________________
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