---

Latest News

 

May 2008

Reforms to DOFI's Insurance Regulation

The Minister for Revenue and Assistant Treasurer released details of a proposal for reform to the regulation of insurance business conducted in Australia by offshore foreign insurers and discretionary mutual funds.

The proposed changes flow from recommendations in the Potts Review which recommended that the Australian Prudential Regulation Authority (APRA) regulate all Discretionary Mutual Funds (DMFs) with contingent risk and all Direct Offshore Foreign Insurers (DOFIs) that did not come from an organisation with prudential regulation that APRA considered comparable to the Australian prudential regulatory framework.

 

What is the effect of the proposed changes?

The proposed changes will result in the following:

• The definition of “carrying on insurance business” in the Insurance Act will be broadened so that anyone carrying on insurance business in Australia (applying for, issuing or arranging insurance), either directly or through the actions of another must become an authorised insurer.
• The Insurance Act will capture offshore foreign insurers who place business either directly or indirectly through an onshore intermediary (broker, agent or underwriting agency) or via a branch.
• The Corporations Act will prohibit the holder of an Australian Financial Services Licence from dealing in general insurance products, which are issued by an unauthorised foreign insurer.
• The legislative changes will be accompanied by modifications to the prudential standards, which apply, to general insurers.
• The Government has decided that discretionary mutual funds will not be subject to prudential regulation but that DMF’s will be  subject enhanced disclosure requirements about their products.

 

Who will be affected?

DOFIs carrying on business in Australia whether as captives, subsidiaries or local branches; and Agencies or brokers that act on behalf of DOFIs.

 

Who will be exempted?

•  Lloyd’s underwriters;
• Offshore Reinsurers; and
• Offshore foreign insurers underwriting specialised risk that cannot be underwritten by local insurers.

 

How will these changes impact on you?

 

DOFI

If a DOFI carries on insurance business in Australia, either directly or through an agent or broker it will need to be authorised under the Insurance Act.

To meet the Australian regulatory requirements a DOFI may consider setting up a branch that has less stringent governance requirements and capital requirements than a company.

If a DOFI underwrites a class of specialised risk, which is not underwritten by a local insurer, it may be exempt from authorisation. Details of the scope of the exemption are uncertain at this stage.

Onshore Insurers

Onshore insurers will need to comply with modified prudential standards, which will be issued. APRA have indicated that it will refine its prudential standards so that categories of insurers with lower risk profiles will experience less extensive prudential requirements.

Offshore Reinsurers

Offshore reinsurers will not be required to be authorised, however they may be indirectly subject to the regulatory regime via the new prudential standards, which will apply to insurers carrying on insurance business in Australia.

 

When will the changes commence?

It is anticipated that the regulatory changes will commence on 1 July 2008.